Advantages of Franchising

Advantages of Franchising a Business Includes Many Significant Benefits for the Franchisor.

Advantages of Franchising - Video Transcript

Now the big advantages of franchising are time, people and money.

It’s faster because other people are out there helping you in the process. If you are looking to sell franchises, a franchisee is going to go out and find a site, they’re going to negotiate the lease, they’re going to hire the people, they’re going to train the people, they’re going to hire the contractor. They’re going to do all the things that take you a lot of time as a business owner. So that allows you to grow much more quickly because you’re leveraging their efforts.

The second is people; you get really highly motivated in management in franchising operations. The reason why is people have their life savings invested in these franchises. So if they have their life saving invested they’re going to make sure that that unit runs well, that unit is kept clean. That people are operating up to standards. I’ve got a great story about this one, a company called Sterling Optical. Sterling Optical is a New York based franchise company that is like Pearl Vision kind of company. And they originally got into franchising for the first time, decided that what they would do is they would sell their units to their existing franchisees. They had about 200 company owned operations, no franchises. And they did leverage buy out, they wanted to recapitalize. So they thought "we’ll sell these off to franchisees." Well when they did that, they realized, in order to do this quickly, they would want to start by offering financing, getting these people in there on an aggressive basis, but they also set up a great experiment. Because if you think about it, they’re selling the exact same unit, in the exact same location, with the exact same product, and the exact same pricing, the exact same personnel selling it, the exact same décor, the exact same location. Nothing has changed. The only thing that changes is that one day this person is a manager, the next day the person is a franchisee. Anybody want to guess what happened? The average unit sales went up 32% in those units. So if you think about that, that’s a pretty big jump. But how many times have you been to a store and somebody gives you the wave, "oh we’re closed now." That doesn’t happen in a franchise. How many times have you had an employee where the employee doesn’t perform up to standards and "well they’re okay, I don’t really want to fire them, they’re a friend." Especially if you’re a manager and not a business owner, that kind of stuff happens all the time. The passion that you surround yourself with as a business owner also is a part of that process. If I’m a Pearl Vision center or a Sterling Optical franchisee, I’m looking around the room saying "Well this gentleman has glasses, I’m going to want to talk to this gentleman after, I’m sure I can get him a good deal, and here’s a young lady with glasses. I’m always out there prospecting, so what happens is as the unit level performance goes up, the other thing that’s nice about these motivated managers is they’re there long term. You look at KFC franchisees, McDonald’s franchisees, they’re third generation. There’s nobody at McDonald’s corporation that can even hold a lick to that. These people have been there for decades. So they’ve got engraved cultural experience that they’ve been brought up with. So motivated and long term management is a big advantage to franchising.

The third big one and reason why a lot of people get into franchising in the first place is capital. You’ll grow with other people’s money. And that does allow you to grow more aggressively because the cost of getting into a franchise program is much less than the cost of opening a unit after unit after unit for almost any business.

While franchising provides franchisees with a proven system and the support of a much larger organization, the advantages to the franchisor are even more significant.

Capital

Since franchisees use their own capital, the franchisor has virtually no investment at the unit level. Franchising allows companies to leverage off the assets of franchisees.

Return on Investment

Because of this lower investment, ROI will be significantly higher.

Risk Reduction

With no capital invested in units, risk is reduced substantially.

Limited Contingent Liability

The franchisor will not be signing leases, taking on financing, etc., and will thus expand with limited contingent liability.

Speed of Growth

By leveraging off of the time and efforts of its franchisees, a franchisor can grow much faster without adding staff.

Reduced Role in Day-to-Day Operations

As a franchisor, your primary concern involves the franchisee’s top line performance, reducing the scope of your involvement in day-to-day management.

Reduced Vicarious Liability

The liability for acts of employees (e.g., sexual harassment, EEOC violations, etc.) and for occurrences in the unit (e.g., slip-and-fall) accrues to the franchisee, not the franchisor, for the most part.

Highly Motivated Management

Franchising can provide a company with highly motivated management who will treat individual units as its own.

Quality Control

Franchisees generally keep their units in better operational shape than unit managers and, as a part of the community, are better able to promote these units locally.

Long-Term Management

The franchisor can invest in the long-term training of its franchisees, as they are unlikely to leave short-term.

Unit Performance

Units are generally better run, as is reflected in the fact that franchised stores generally outperform company-owned stores in terms of sales volume.

Lean Structure

Franchisors can grow the organization without adding significantly to overhead.

Brand Building

This ability to grow the organization without substantial additions to overhead will allow franchisors to grow their retail presence and their brand more quickly and effectively.

Advertising

Franchisees will often contribute to a common advertising and promotional fund. This fund will be used to promote the brand under the direction of the franchisor.

International

International expansion becomes easier, faster, and carries far less risk since a local partner becomes involved.

Moreover, it is important to note that franchising is not an exclusive strategy. Most franchisors use it in conjunction with company-owned growth to compound growth.