The main advantages of businesses that are considering franchising is the capital growth speed as well as motivated management and risk reduction. However, there are other advantages too.
1. Capital
The biggest obstacle to growth faced by small-scale businesses today is the inaccess to capital. Prior to the tightening of credit in 2008-2009, and subsequent “new regular” that followed, entrepreneurs often discovered that their goals for growth were outstripping their capacity to finance them.
Franchising, a possible alternative option for capital acquisition provides a few advantages. The principal reason why entrepreneurs choose franchising is because it lets them expand without the burden of borrowing or paying for equity. In the first place, because the franchisee is the one who provides the money needed to establish and manage a company which allows businesses to expand using the resources of other companies. With the help of other people’s funds it allows the franchisor to grow without the constraints of the burden of debt.
Additionally, since the franchisee and not the franchisor sign the lease and agrees to various agreements and agreements, franchising permits expansion that is virtually free of potential liability, thereby greatly lessening the risk to the franchisor. That means that as an owner of a franchise, it is not just that you require much less capital you can expand your business, also your risk is mostly restricted to the amount you spend on the development of your franchise business -which is usually less than opening an additional corporate-owned location.
You can find out more on franchising by reading this article…
2. Motivated Management
Another obstacle that is a major issue for entrepreneurs looking to expand their businesses is finding and keeping good unit managers. A lot of times the business owner will spend long hours searching for and preparing an employee, only to have them go or, even worse be sacked by another company. The managers who are hired are employees who might or may not be genuinely committed to their work and that makes overseeing their work from afar difficult.
The franchising system allows the owner of the business to solve these issues by replacing an owner in place of the manager. There is no one more driven than one who is genuinely committed to the performance of the company. The franchisee is the owner, often with the savings of his entire life in the venture. The compensation for him will be mostly in the form earnings.
Combining these elements can have a variety of positive effects on the performance of units.
Long-term commitment. Because the franchisee is committed in her business, she’ll be unable to walk out of her company.
Better-quality management. As an in-term “manager,” your franchisee will continue to gain knowledge about the business and will more likely to develop experience in your company which will help him become an effective manager over the course of many years, perhaps decades, of his life working in the company.
Better operational efficiency. Although there aren’t any specific studies that quantify this aspect, franchise owners usually take pride in owning the business with a lot of pride. They’ll keep their premises clean and educate their employees to be better since they own, not run the business.
Innovation. Because they’re invested in the business’s success franchisees always look for ways to improve their operations — something that managers rarely possess.
The majority of franchisees outmanage managers. Franchisees should also be more attentive on the financial part of the equation -cost of labor and theft (by both customers and employees) and other line item costs that could be cut.
The majority of franchisees outperform managers in general. Over time both research studies and anecdotal data have shown that franchisees can outperform managers in terms of revenue generation. Based on our experiences the improvement in performance can be significant, usually between 10-30 percent.
3. Acceleration of Growth
Every entrepreneur I’ve met who has created something that is truly original faces the same nightmare of having someone else take over the market with their own ideas. These fears are often grounded in reality.
The issue is the fact that opening just one unit requires time. For certain entrepreneurs, franchising could be the only method to guarantee an advantage in the market prior to competitors invading their market, as the franchisee is responsible for most of these functions. It not only grants the franchisor to leverage financial resources, however, it allows it to make use of its human resources. The franchising model allows businesses to compete with bigger businesses, which means they are able to dominate markets before the larger businesses can react.
4. Staffing Leverage
Franchises can operate effectively while maintaining a slimmer structure. Because franchisees take on many of the tasks normally handled by the corporate headquarters Franchisees can use their efforts to decrease the overall amount of staff.
5. Facilitation of Supervision
From a managerial point perspective, franchising has additional advantages. In one sense, the franchisor does not have responsibility for managing the day-today operations of franchisees. On a micro-level this is the case if leader of a shift or crew member is unwell at the mid-night the franchisee will call and not youto inform them. The franchisee is responsible to come up with a suitable replacement or fill their shift. If they decide to pay wages which aren’t aligned with market trends, employ their relatives and friends or make extravagant or unnecessary purchases, it will not affect the financial results of you or your business. In removing these obligations the franchising process can allow you to focus your efforts to improve the overall picture.
6. Improved Profitability
The leverage of staffing and the ease of supervision outlined above allow franchise companies to function in a profitable way. As franchisors can rely on their franchisees to perform lease negotiations, site selection local marketing, recruitment, training as well as payroll, accounting and various other human resource functions (just to mention some) the organization of the franchisor is usually much smaller (and often leverages on the company already set up to support company operations). The result is that a franchise company could be more profitable.
It is, however, difficult to prove or quantify this claim. What we do know is this research conducted over the last 10 years has shown that top-quartile franchisors added the average at 40 percent and 45.6 percent of their revenue on at the lowest point in 2002 and 2001 respectively. What industries do you know of which net profits within this range are feasible?
7. Better Valuation
The combination of increased growth, faster profits, and a higher organizational leverage can be a reason for the fact that franchisees are usually valued at a higher value than other companies. Therefore, when it’s the time for you to dispose of your company it’s likely that the fact that you’re a successful franchisee who has developed a sustainable growth strategy is definitely an advantage.
The iFranchise Group compared the valuation of the S&P 500 against. the franchisees tracked by Franchise Times magazine in 2012 The ratio of the price to earnings of franchise firms was 26.5 in comparison to the average ratio of P/E for the S&P 500 was 16.7. This is a staggering 59 % premium over the S&P. Furthermore over two-thirds of the franchises that were surveyed outperformed their S&P ratio.
8. Markets penetrated by the Secondary as well as Tertiary Markets
Franchisees’ ability to enhance the performance of their unit is a significant factor. A typical franchisee won’t just be able to earn greater revenues than a manager working in an identical location, but also be more vigilant at expenses. Additionally, as the franchisee is likely to have a different structure of costs than you as an owner of a franchise (she might pay less or not offer the same benefits and benefits, etc. ) In many cases, she will be able to run a business better than you do, even when accounting for the royalty she has to pay you.
As an owner of a franchise, this could provide you with the ability to explore markets where the corporate return could be minimal. However, you shouldn’t think about an area that you don’t believe gives the franchisee an excellent chance of successful. However, if your plan involves the creation of corporate units, in addition to franchising, it’s likely that your budget for capital development isn’t enough to allow you to establish the number of locations you’d prefer. Franchisees however can be successful in opening and operating successfully in areas that aren’t top of your list for development.
9. Reduced Risk
Because of its nature the franchise model also lowers risks for the franchisee. Unless you decide to arrange the franchise differently (and only a few do) the franchisee is responsible for all responsibility for the cost of the franchise and for the cost of any building-out costs, buying all inventory, hiring employees, and is responsible for all working capital that is required to start the business.
Franchisees are also the person who signs leases for vehicles, equipment and the physical location. It also is accountable for the actions that occur within the premises which means that you’re generally exempt of any responsibility for litigation involving employees (e.g. sexual harassment or age discrimination EEOC) or consumer lawsuits (the hot coffee that spilled onto the lap of your customer) or any incidents that happen within your franchise (slip-and-fall and employer’s liability and so on. ).
Furthermore, it’s likely that your lawyer and other advisors may suggest that you establish a new legal entity to serve in the role of franchisor. This can further reduce the risk you face. Also, since it is true that the expense of becoming a franchisee usually less than the expense for opening another location (or the entry into a different market) Your startup risk is significantly reduced.
This combination of aspects will provide you with a significant reduction in risk. Franchisees are able to grow to hundreds, or maybe thousands with a small investments and without spending money for expanding their business.