This morning I attended a presentation on Franchising 101 sponsored by NYC Business Solutions. Not all businesses can growth through becoming franchises and not all businesses that can become franchises become successful revenue-generating enterprises. In other words, franchising may or may not be a successful business path, and it depends not only on the strength of your brand but also on how well the franchisor manages, supervises and coaches its franchisees. Essentially, franchising your business is like growing it with other people’s money (but not through issuing equity or debt). So, instead of investing $$$ into opening another location, franchisor usually gets $$ as an initial payment from the franchisee. Sounds like a great plan! But it is not as easy as it sounds. Here are some advantages and disadvantages of running a franchise that were identified at today’s session.
Only certain businesses can become franchises. A business that can be franchised has the following characteristics:
1. It is already very successful. Strong demand for this product or service and consistent positive margins attract potential franchisees.
2. Business has a strong brand that is recognizable or can become recognizable regionally or nationally.
3. Business has protected and registered intellectual property (trademarks, logos, tradenames).
4. Business can be easily replicated ten, twenty or even more times by the franchisees.
Advantages of having a franchise include:
1. Franchisor does not need to put in cash, seek investors or take out a loan in order to expand his or her brand.
2. Upfront payment (ranging from $10,000 to $30,000) and weekly or monthly royalty payments (approx 5% of revenue) represent a nice stream of income.
3. Smaller time commitment required from the franchisor (as compared to operating multiple locations).
4. Franchise contract provides detailed specifications for all locations, so all locations look like parts of the same business.
5. Franchising (especially through granting a master license to develop certain territory to a master licensor with right to sell and manage sub-franchises in that territory) may be a good cost-effective way for a foreign business to enter a new market.
And finally, some challenges:
1. There is a danger that franchisees are not recording all their revenue in order to decrease royalty payments. Franchisor needs to monitor sales which it may do through royalty audits, sending in mystery shoppers, or monitoring supplies.
2. Costs of complying with federal and state laws can be high, as the laws require franchisors to provide extensive disclosure documents, including audited financials (renewable yearly).
3. Compromises on quality of product or service by the franchisees may damage franchisor’s reputation and brand. Therefore, franchisor must supervise, train and advise franchisees on how to run a successful business on an ongoing basis.
4. Finding the right franchisees and the best franchise locations may be challenging.
Overall, business owners should carefully consider franchising their businesses. For some owners, who want to remain in control, franchising may not be an option, whereas for other owners, franchising may present an ideal solution. There have been many successful franchises (MacDonalds, Subway, Burger King) that set examples for how to grow an empire using other people’s money.