Franchising is a unique business proposition that isn’t appropriate for every company or every concept. When a system works well, it can result in exciting financial and marketplace growth. At the same time, failure of a franchise program could lead to significant losses for all stakeholders.
It’s important to analyze the advantages and disadvantages of franchising your business so that you make the most informed and responsible decision for your company and its existing operations, employees and bottom line.
Financial advantages and disadvantages to franchising your business
A properly organized franchise agreement complements a corporate brand as it produces revenue for the franchisor and maximizes profits. Franchisors collect revenue from franchise owners in the form of the franchise fee, royalties and various other fees-for-service as laid out in the franchise agreement.
Revenue gained from a franchise system provides a salient source of expansion capital for the franchisor. The franchise company can continue to add units to its network, effectively minimizing its growth risk with each new franchisee.
One caveat to this growth strategy is the upfront investment required to start on the path toward an organized franchise company. Franchising your business means establishing a separate corporation, along with an extensive set of franchise business plans that are summarized in a Franchise Disclosure Document (FDD).
Setting up a franchise requires several steps in which you must invest, including:
- Creating a business plan
- Crafting an operations manual
- Writing plans for franchisee training and support
- Drafting franchise legal documents, including your franchise agreement
- Hiring staff or expanding staff roles (and payrolls)
- Developing a franchise recruitment plan
- Executing digital marketing for lead generation
Allocating capital toward the creation of a franchise system carries risk, just like any other investment. You face both financial advantages and disadvantages to franchising your business. With thoughtful analysis and careful planning, many franchisors find great fiscal reward in their franchise programs.
Business growth advantages and disadvantages to franchising your business
Each franchise agreement requires franchisees to use the name, branding, recipes and practices of the franchisor. This is the cornerstone concept of franchising, and it also results in one of the most important benefits of a franchise network — brand expansion. As a brand gains more market relevance, it earns a larger share of the industry. This increased market penetration represents a major advantage of franchising your business. Often, franchisors find their domestic network gaining so much ground that international expansion is the next logical step. Franchise systems can potentially lead to faster expansion compared to the growth of company-owned locations.
As a franchise network broadens, the franchisor’s responsibility for managing it grows. It’s part of the commitment they made to franchisees in the franchise agreement. Rapid expansion presents a challenge for many franchise companies that find they must grow their franchise support staff at a greater rate than they anticipated. Innovation can also become more complex within a franchise system. If an ice cream shop decides they would like to modernize their milkshake-making equipment, suddenly they must reconcile the replacement of milkshake machines network-wide. A well thought-out system of processes, laid out in a Franchise Disclosure Document, can ease this type of change. In this instance, the franchisor will still have to complete the legwork of making sure everyone gets a new milkshake machine, but its support plan will lay out exactly how to accomplish that task.
Advantages and disadvantages of franchising your business from a management perspective
Growing your system means increasing the number of employees you’ll need to assist franchise owners and make the franchise company itself run smoothly. Likewise, as you add locations, more employees will come under the umbrella of your brand. Whether they work for you or for your franchisees, bringing in more employees increases the likelihood for intelligent and talented people to rise to the top. For decades, many franchise systems have found that employees who come into their brand through their franchise system tend to stay, moving on to managerial positions or joining the franchisor’s leadership team. Wherever these people work within your system, you’ll experience the benefit. Remember, you franchisees’ success is your success, too.
Also, pursuant to the franchise agreement, franchise owners assume the responsibility of recruiting, hiring and managing employees, whereas parent companies handle these duties when opening new corporate locations. This shift in responsibility removes the onus from the franchisor, but it also results in less control over those employees. If a manager is under-performing, the franchisor must work through the franchise owner to remove that person. In most cases, they do not have unilateral authority over those decisions and must rely on the franchise owner’s discretion. They also rely on the franchise owner to foster a sense of community among the employees at his or her locations. However, franchisors can help them in this regard, by presenting and enforcing a strong corporate culture that makes sense for franchise owners to implement.
If you are thinking about franchising your business, read Harold’s Franchise Legal Services for New Franchisors. If your a current franchisor, read Harold’s Franchise Legal Services for Existing Franchisors.
Harold L. Kestenbaum assists companies in legally organizing their franchise companies. For more information about the legal implications of franchising your business, contact Harold.