When most people hear the word “franchise,” they probably think of a huge, modern-day corporation, like McDonald’s, and its thousands of fast food outlets all over the world. But this type of business model is not new; in fact, it has been around since at least the Middle Ages, and the modern version of it is credited to Benjamin Franklin. What’s more, it is certainly not limited to businesses the size of McDonald’s. With a little work, anyone with an easily replicable business model can franchise their company – small businesses like florist shops, electrician services, boutiques, and even early education centers do it all the time.
Why do small businesses choose this option? Simple: franchising can be a quick way to grow your profits without having to put all the work and capital into running a second (or third or fourth!) location yourself. But is it right for your business? There are pros and cons that you need to consider before deciding.
The Two Main Franchise Business Models
First of all, how do franchises work? Simply put, you, the business owner (or franchisor), own the business, but license someone else (your franchisee) to use your trade name and operating systems. The franchisee pays you a fee (called royalties) to use your business model, and you enter into a legal and commercial agreement with them, as well as provide them with training, support, and operational instructions.
Let’s look at the two primary types of franchise business models, so you can get a better idea of whether you think your business is replicable. The two main types are:
- Product Distribution Franchises – In this model, the franchisor manufacturers the product and the franchisee sells the product. It is similar to a supplier-dealer relationship, except that in the franchise relationship, the franchisee may distribute the products on an exclusive or semi-exclusive basis instead of being able to sell several different brands at once. Coca-Cola would be an example of this type of model.
- Business Format Franchises – This type of model is more common, and probably more suited to most small businesses. In this model, the franchisee is allowed to use the brand and trade name of the franchisor, like in the product distribution model, but they have access to more than just the product – they also have access to the product distribution model. In other words, your franchisee would sell your product or service in the same way that you do – think fast food or clothing store chains.
Second, is franchising right for you? If your business is booming, and you think there’s a market for it to be franchised, then you need to carefully weigh the pros and cons of expanding it in this way. There are three major advantages to franchising your business:
- More talent – While you can certainly find talented employees who are willing to work hard for your business, it could be much easier to find talented people who are willing to work hard to run their own business. Your franchisees will have a financial stake in your business and so will be more invested in working hard to keep it growing.
- Easy growth – If you’re looking for an easy way to obtain expansion capital, franchising could be the way to go. Franchisees pay you so that you can expand, giving you quick access to funds without having to deal with banks or investors. And that means you’ll be able to pump more money into your inventory, marketing costs, etc, so you can keep the cycle of growth going.
- Less risk – Franchising can generate high financial returns for relatively little risk. Unlike adding a new location that is owned by you, when you franchise, you put relatively little money into opening a new franchised outlet. In addition, if you’ve got a good business model, the royalties you make from your franchise could end up being more than the profits you would have made from opening your own new location.
There are definitely some compelling reasons to franchise your business, but there are also drawbacks. The three major cons of franchising are:
- Less control – Franchisees are not your employees, they are independent business owners. As such, they are willing to work hard for your business, but they also have their own goals and you may end up coming into conflict with them over certain things. For example, your franchisee makes money from their franchise’s profits, and you make money by collecting a percentage of their sales as a royalty – this means that your franchisee will not be happy with anything that boosts sales but not profits, like promotions or coupons. You’d have to work this out with your franchisee – again, they are not your employees – or you could end up in a legal tangle.
- A diluted community – When you manage a team at your own locations, you’re all rowing the same boat, so to speak. If you end up with multiple franchisees, however, you could have a situation in which some franchisees are willing to let other franchisees do all the work to drum up business. Or, even worse, you could end up with franchisees who all assume that the other franchisees will pay for advertising, for example, and no one ends up putting in the time or money to grow your business.
- Fear of change – Being the owner means innovating, coming up with new ideas, changing…but being a franchisor means having to run all of your new ideas past your franchisees, and getting them to agree to your new ideas. That can require negotiation on your part, and you could end up butting heads with a franchisee who is worried that any changes could affect their profits.
Tips for Getting Started
Finally, if you do think that franchising your business is right for you, then it’s time to sit down and really think about the marketing, legal, and logistical ramifications of your choice. Start by doing the following:
- Taking the time to outline exactly how your business works – This is generally a good idea anyway, so you know for yourself exactly how clear you are on your business’ marketing strategy, design, staff training, etc – but you’ll definitely need to be able to convey everything in a crystal clear, well-outlined way to franchisees.
- Talking to a lawyer – Getting legal advice is a must, especially for help with filling out a Franchise Disclosure Document, which you’ll need before you can move forward with your franchise.
- Working on building and protecting your brand – Think about it: if you’re going to be a franchise, you need a solid, recognizable brand – and you’re going to need to protect it. Don’t let anyone use your brand in any way that is not approved by you.
- Talking to prospective franchisees – Treat picking your franchisees like picking a dating partner – be picky! Just having the money to buy into your business is not enough, they need to be able to run a location and represent your business.
- Thinking about locations – Decide where you would want new outlets of your business to pop up – nearby? Far away? Remember, if they’re too close together, they could cannibalize each other. Too far apart, though, and you could be looking at some major inconveniences.
- Finding a mentor – Talk to someone – or lots of people! – who have gone through the process. Get honest, trusted opinions, and, if you decide to move forward, pick someone who’s willing to give advice as you go.
When you started your business, you probably had big dreams about growing and expanding – and now you’re at the point when you can start to think about how that growth will look. Congratulations! But now comes the next stage in your hard work: looking at all the different ways that you can grow your business. Franchising is one of these ways, and, if you’ve got the right business model, this choice could catapult your business to the next level.