The AFA presents a short article on the benefits of franchising.
Why go into business? There are many reasons why someone would want to go into business for themselves; everyone has their own. But, whether it is to be their own boss, work hours to suit themselves, fit around family life, fill a market niche, or financial security, there is one factor that everyone wants… SUCCESS. You may decide to remain a small company, but long-term success in business generally means growth and for sustainable growth, you must expand. This can be either through additional company-owned operations or through franchising.
“Ultimately, the management and profitability of every additional operation remains your responsibility.”
Whilst you may retain overall control of additional company-owned and run operations, there are several issues to be resolved when setting them up. New premises and equipment require significant capital investment, a risk in any economic climate, becoming a large overhead, and any borrowed capital must be repaid with interest. Expansion can quickly soak up any liquidity as the business becomes asset-rich, rather than having a healthy bank balance, and can restrict diversification and further product development. In addition, setting up new operations can be lengthy and expensive and once established, they must be managed effectively, giving rise to issues of control, supervision, recruitment and ongoing employee relationships. Ultimately, the management and profitability of every additional operation remains your responsibility.
Franchising “allows for rapid growth with little direct risk”
Franchising, on the other hand, can turn many of these issues into positive benefits. Capital investment and risk is provided by the franchisee. As this investment does not have to be repaid, it can be used for future financing, product development and diversification and to sustain business growth. As it is the franchisee’s investment capital, expansion is not limited to your capital or ability to borrow and you can use the time, money, ideas, contacts and resources of others to expand. The cash flow and financial condition of the company is immediately improved as it becomes cash-rich, rather than having its money tied up in assets. It allows for rapid growth with little direct risk, improving the company profile and visibility. The franchisor company can operate with a minimal number of employees as their relationship is with the franchisee. The day-to-day operational management of the franchise, premises and equipment leases, employee relationships and the profitability are all the responsibility of the franchisee. Unlike the franchisee, the franchisor’s income is not dependent on profitability but on gross sales, much easier to monitor.
“Franchising is not a ‘fire and forget’ strategy to get rich quickly.”
Franchising is not a ‘fire and forget’ strategy to get rich quickly. However, as the franchisor has responsibilities to their franchisees and, like all businesses, professional relationships must be maintained and commitments honoured. That said, the benefits of franchising outweigh many other business development strategies for sustainable growth and, along the way, can help other ambitious individuals to succeed in their own business. Franchising can grow your business with little risk to yourself, help you influence your market, generate residual income and bring you the success you went into business for in the first place.