Advantages of Franchising

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

The 15 Advantages of Franchising a 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. Below are 15 advantages of franchising.

1. Capital Preservation

Capital is the primary reason most companies turn to franchising, and the most common barrier to expansion by small businesses. 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 rather than financing or making deals with venture capitalists.

2. Return on Investment

Because of this lower investment, ROI will be significantly higher. Franchisees use their own capital to open and operate a unit. Franchisors depend on their franchisees to manage the following:

• Site selection
• Lease negotiation
• Local marketing
• Hiring
• Training
• Accounting
• Payroll
• Other human resource functions
  

3. Risk Reduction

With no capital invested in units, risk is reduced substantially. The franchisee has all the responsibility for the investment made in the franchise operation. Also, they are generally responsible for the following:

• Location build-out
• Inventory
• Employees
• Working capital
  

4. Limited Contingent Liability

The franchisor will not be signing leases, taking on financing, etc., and will thus expand with limited contingent liability. The franchisee is generally responsible for:

• Location lease
• Equipment
• Vehicles
  

5. Speed of Growth

Opening just one additional unit takes time. By leveraging off of the time and efforts of its franchisees, a franchisor can grow much faster without adding staff. Also, franchising may be the only way to grow quickly enough to ensure that you capture a market leadership position before competitors swoop in.

6. 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. This frees up your time to focus on overall strategic improvements, both at the micro level (improving unit-level performance) and at the franchisor level.

7. 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.

8. Highly Motivated Management

When expanding, it’s extremely challenging to find and retain good unit managers. Franchising can provide a company with highly motivated management by substituting an owner for the manager. No one is more motivated than an owner who is literally invested in the success of the business.

9. 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. They take pride of ownership and operations seriously – from location cleanliness to training employees.

10. Long-Term Management

The franchisor can invest in the long-term training of its franchisees, as they are unlikely to leave short-term since they have materially invested in the unit.  As a long-term “manager,” your franchisee will continue to learn about the business and gain institutional knowledge which will make them a better operator throughout the years. In fact, many franchisees end up passing down their business to a child or other family member.

11. 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. Franchisees are always working to improve their business since they are fully invested.

12. Lean Structure

Franchisors can grow the organization without adding significantly to overhead. This is due to the franchisee taking on the responsibilities of operating their unit (leases, employees, inventory, marketing, etc.).

13. 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.

14. Advertising Impact

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.

15. International Expansion

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.