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What are the advantages and disadvantages of of franchising for businesses?

Franchising as a way to expand a business while maintaining control is not a noble idea but dates back thousands of years possibly as far as the Romans and/or the Chinese. Over time a variety of businesses for instance The British East Indies Company & London Company in the mid18th century predominantly in Europe, used franchising to grow and control their product distribution business. Many businesses believe in the virtue of franchising their businesses and have taken further steps to expand their business. There are a number of advantages for most companies entering the domain of franchising. The primary merits include capital, speed of growth, motivated management, and risk reduction with many others to mention.

How Franchising Helps Grow Capital?

Franchising can be regarded as an alternative form of capital acquisition. Franchising is designated for expanding the business without the risk of debt or the cost of equity. Using the resources of others when the franchisee provides all the capital required to open and operate a unit will undoubtedly allow companies to grow. Moreover, franchisee’s money plays a facilitative role for the franchisor to grow largely unfettered by debt. Franchising grants for expansion with virtually no contingent liability as the franchisee signs lease and commits to various contracts which therefore markedly reduces the risk to the franchisor. This in fact, works to the advantage of the franchisor now demanding far less capital to develop and with risks limited to the capital they need to invest in expanding franchising company which in particular is less than the cost of opening additional company-owned locations.

Franchising and Motivated Management

Franchising can have an indirect or direct advantage on the incentives of the management system within the organization. By substituting an owner for the managers in the franchising business many stumbling blocks facing entrepreneurs to train, hire and retain managers are disposed. It is clear that a manager who is materially invested with his life’s savings in the business will have high levels of motivation. Therefore, this compensation will result in the form of profits for either the franchisor or franchisee thus having several positive effects on the unit level performance. Long-term commitment, better-quality management, improved operational quality, innovation are amongst various positives franchising bestows on the management systems.

Will Franchising Influence the Speed of Growth?

Competitors have always been an issue when entrepreneurs start a business. Franchising may in most occasions be the only way to ascertain that your business will capture a market leadership position prior to leaving space for the encroaching competitors since opening a single unit takes time. In addition, the franchisee performs most of these tasks. Franchising allows the franchisor financial leverage as well as human resources. By franchising much larger businesses will compete so they can saturate markets before these companies can riposte.

Franchising and Increased Profitability

Being able to run in a highly profitable manner is the result of staffing leverage and ease of supervision benefited from franchising.  Furthermore, profitability of a franchise can hinge on their franchisees to undertake site selection, lease negotiation, local marketing, hiring, training, accounting, payroll, and other human resources functions. So the net result is that a franchise organization can be more profitable.

Franchising and Reduced Risks

Since the franchisee is accountable for the investment in the franchise operation, franchising can play a significant role in reducing risk for the franchisor. Chances will be more if the franchisor chooses to structure it differently. It is made essential for the franchisee to pay any build-out, purchase any inventory, hire any employees and be accountable for any working capital needed to establish the business. Along with all, the franchisee has to execute leases for equipment, autos, and the physical location and is liable for everything within the unit. This helps the franchisor to stand away from employee and consumer litigation or any incidents occurring in the franchise.

Franchising Improves a Firm’s Valuations

Franchisors are mainly valued at a higher multiple than other businesses since the combination of faster growth, increased profitability, and increased organizational leverage accounts for their increased value. So time to sell the business, being a successful franchisor that has established a scalable growth model could beyond doubt be an advantage.

Is Franchising Appropriate for any Type of Company?

Franchising is a long-term partnership and companies must recognize the true nature of the relationship, and the responsibilities on each partner at the first place. Product or services which are likely to have a short term market may not be suitable for franchising. Other examples are businesses that address a small niche market that only exists in a limited geographic area or a business that return low growth margins. Whereas brands with compelling sales proposition as well as businesses that have developed quality, consistent and documented process for creating products/services are among businesses that would respond to franchising strategies. Consistency plays a key role for franchises along with repeatable business models which satisfies the needs of a franchisee.

mehrzad manuel ferdows

Published inarticles

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