Why do Companies Franchise their Business?

why do companies franchise their business

There are a number of reasons why companies franchise their business.  The primary reason is, of course, they want to transition from a small-scale business owner to a franchisor and scale their business dramatically.

But, ask any franchisor this question and you are sure to hear plenty of other solid reasons they made the decision to franchise.

This article will help you understand why companies franchise their business, the benefits of doing so and other considerations that come into play in this important financial decision.  

What is Franchising?

Franchising is classified as a type of marketing and distribution where the franchisor (the owner of the business) gives the franchisee a license that grants them permission to sell products or services under the franchisor’s brand name. The franchisor can also grant the franchisee business knowledge, trademarks, and processes.

Ideally, franchising allows you to expand your reach exponentially as it creates a growth opportunity for national brand awareness.

Why do Companies Franchise their Business?

Access to Capital

Franchising offers the franchisor a different method to acquire capital. This business structure allows franchisors to expand their market share while shifting the financial risk, normally associated with expansion, to the franchisee. This approach also lowers the franchisor’s debt risk and their cost of equity. Franchising is a great way to expand without losing control or taking on additional debt burden from bank loans.

The franchise business model provides the capital and resources required to grow a business. The franchisor can then use the royalties and the sale of franchises to provide the capital needed for future expansion.

Increasing Market Power

Franchising allows a brand to have multiple outlets, thus increasing its market presence. With this increased market presence, customers have more exposure and familiarity with the brand. The increased brand awareness and recognition in the market helps create a competitive edge over other competitors.

Resale Value

Franchising is classified as a method of expanding a business by establishing different networks. It helps a business grow nationally, and maybe even internationally, while strengthening the overall business model. It is a suitable method of increasing the value of a business, and its proven process, procedures, and operating systems.

Speed Growth

Franchising is a method that allows the franchisor to expand the business without incurring the cost of equity. In most circumstances, the franchisee will provide the capital required to open a new location.Thus, the franchisor can focus their effort on overall system growth, while the franchisees will focus on growing their individual locations. 

Staffing Leverage

Franchising is a business model that allows a brand to function with a leaner organization. Remember, the franchisee is responsible for operating and managing the new location, and the franchisor is responsible for providing support to the franchisee system. This allows the franchisor to leverage their efforts and minimize staffing.

Increased Profitability

Staffing efficiency generally translates into higher profits. Higher profits enable the franchisor to focus their efforts in support areas that will benefit the overall system – lease negotiation, facility design and construction, marketing and social media support, lead generation, and much much more. Remember, a franchisor will not incur any costs in leasing, hiring, local marketing, and other direct expenses for a new location, but they will provide invaluable assistance to the franchisee in all these areas.

What are the Risks of Franchising?

Reputation Damage

A franchisor expects the franchisee to always protect the brand’s reputation. If the franchisee ignores the customers’ needs,they can destroy the reputation of the business. Also, if the franchisee engages in anything illegal, the franchisor might be held accountable and suffer liability.  

Franchisors go to great lengths to protect their brand name, reputation, and image.They provide detailed information outlining their responsibility, and the franchisee’s responsibility, in the Financial Disclosure Document.

Compliances

The Government sets various regulatory compliance laws for franchisors. If a franchisee is found to be violating any compliance requirements, the franchisor will also be at a loss. Any abrupt closure of one location can lead to customers questioning the integrity of your brand.

Capital Investment

For a business to be a viable franchise model, it might require a significant investment. Loans can be secured from financial institutions to convert a business, or to invest in a new franchise. However, if the company fails, there are significant risks, and potential investment losses.

How Does the Franchisor Make Money?

Making money from the franchise system is a different strategy compared to other business models. In most instances, the franchisor generates revenue in two ways:

  • They charge a royalty fee as a percentage of the gross sales; and 
  • They charge  an initial franchise fee in order to obtain a license to operate under the brand’s name.

Why Choose Us to help you navigate the franchise world?

The process of buying a franchise is quite daunting, and there are various risks involved. Here at Franchise Me Consulting, we understand how important this decision will be. Our professional team at Franchise Me Consulting has a world-class understanding of the franchise market and will help you understand the benefits and risks inherent with franchising. We offer streamlined solutions and support to guide you to future success, and make your foray into franchising easy and painless.

Are you ready to take control and change your destiny? Trust in yourself and be confident. Take the first step and call Franchise Me Consulting today to start your journey towards a new lifestyle.

About Us

Franchise Me Consulting, Inc. understands that business success starts with developing relationships, and I take that commitment seriously. Matching you with the perfect franchise is the goal, but to me, true success comes when you say, “thanks, this is the best decision I ever made!”

So, whether you call me Coach, Recruiter, Partner, or just Mentor… Let Franchise Me Consulting, Inc. help you find the perfect match. I promise to earn your trust!

Contact Us

Franchise Me Consulting, Inc. © Copyright 2021