August 12, 2015
Businesses looking to expand often find themselves at a crossroads: franchising vs. traditional expansion. Despite experts trying to sway you one way or another, there’s no cookie cutter answer.
It boils down to your specific business model, your vision for your business, market trends and ability to franchise. Not every model should, or can be, franchised. With that in mind, here are the pros and cons of franchising your business:
Franchisees front the capital needed to open a new location. This creates less financial risk for you. Your name isn’t signed on the property lease. You didn’t purchase the equipment.
You have less financial risk when a franchise opens your next location.
This doesn’t mean that you don’t invest any money into the process. The initial process of becoming a franchisor will be a substantial investment. Once you complete that, the franchisees shoulder the majority of costs moving forward.
No Dilution of Your Equity Interest
If your forgo the franchise model and decide to open up more company stores you may need to raise capital to finance your expansion, you will dilute your interest in the company. Depending on how much money you need for expansion your dilution can be substantial. In addition, you may be required to give up board seats and alter possibly the vision of the company. Any further expansion wil further dilute your interest.
Limiting the necessary capital to expand drastically expedites the rate you can grow. Traditional models hinge on you funding the next location. That includes the entire overhead, equipment, leases and more. It all adds up.
With franchising, you remove your need to fund the expansion. Rather than capital, your ability to scale is now dependent on your ability to attract new franchisees and help them be successful.
Not only are the operators running the franchise locations committed, they are financially invested in seeing this location drive success. This alters the way they approach running your business.
They will be more dedicated. They will work harder. They will be more creative in their marketing efforts.
Sure you can hire a dedicated manager. They might be a phenomenal employee. But at the end of the day, overseeing your business is just their day job. Franchisees have an entrepreneurial drive and financial skin in the game.
Bottom line, they care more about the success than any employee you can find.
Franchisees are independent business operators. It doesn’t matter how detailed you outline best practices, establish process or structure the FDD, franchisees will always be in the driver seat of that location.
While you create the structure, they control an element of your brand.
Changes the Day-to-Day
Depending on which aspect of your business fuels your passion; this may actually be a pro. Franchising drastically changes your day-to-day duties.
When you bring on franchisees, they will need to be managed. Throughout the onboarding process, this will mimic hand holding more than managing. People choose to purchase a franchise for several reasons, including:
This population will choose your business model because it’s been proven and you provide support.
Managing operators will be a time-consuming process.
While some of these responsibilities would develop as you expanded through the traditional model, it comes down to a scale feature. You will bring on franchise locations faster than you would’ve expanded on your own. That’s one of the key benefits of franchising.
If your passion is running all the pieces and being super plugged into your business, you may need to bring on a franchisee manager. You remain in charge of the business. They then oversee the franchising efforts. For family businesses, this often presents a great opportunity for a child to spearhead efforts in the business.
Selling Your Business—Not Just Your Product
Entrepreneurs often overlook that franchising means they are now selling their business.
You’re selling it to business brokers. You’re selling it to prospective franchisees.
It will seem like a never-ending selling cycle. You’re constantly proving the validity of your business model. Depending on the popularity in your region and the particular model, this can be an intensive process.
You need to showcase that your business model is:
This is a drastic shift from running your business and selling your products.
If you find yourself at this particular cross roads on the horizon, let me help. Together we can evaluate where your business is today, and what each path would mean through the lens of your company.
You can also download my free franchisor workbook. This detailed guide will help you evaluate exactly where your business is in the franchise process, and what steps you would need to complete to become a franchise.