The franchise model of business is beneficial for both the buyer and the seller. Franchising is a stage that comes after the business has established itself. When your brand has gained popularity and expansion can be profitable, then start selling franchises of the business. Once the brand gains reputation it is easy to get the lenders or investors on board. It is also important that you understand the nature of the business and the products you are selling. Find out the people who are interested in buying the franchise of your brand. There are multiple benefits that you gain as a franchisor.
What benefits for the franchisor there are?
The primary benefits that you can expect as a franchisor include the speed of business growth, huge capital, reduced risks, and motivated management. Multiple other benefits make franchising a great option for the ones who have a set business.
Capital
Most small businesses are afraid of expansion because of the huge capital requirements. Entrepreneurs often find it difficult to fulfill the goals set for their business due to a lack of ability to fund them. Franchising comes as an alternative for the acquisition of capital that has multiple advantages. In franchising, one can expand the business without the risk of debt or the cost of equity. This is the primary reason why entrepreneurs choose franchising.
The capital which is needed to start and operate a new unit comes from the franchisee. Therefore, the company expands with resources from other parties. The expansion happens with virtually no contingent liability as it is the franchisee who signs the lease and makes various agreements. Hence, the risk involved is very less. The capital which a franchisor needs to invest is mainly for the development of the brand. This amount is far less than what is needed to start a new franchise unit.
Speed of growth
Competition in the market is every entrepreneur’s nightmare. New ideas are launched regularly in the market and the fear that some organizations will beat the success of your brand is genuine. Franchising can be a way for you to secure a leading position in the market before any other organization occupies the position. The franchisee will be performing most of the tasks under your guidance. The franchise business structure gives the franchisor both financial leverage and human resources leverage. Competing with large businesses is a possibility with franchising, letting the franchisor saturate the market before the big brands come in.
Management
Another big hurdle entrepreneurs face when expanding is finding and retaining effective managers for the franchise units. Business owners often spend days looking for managers, but many leave and are not committed to the job. Also, supervising their work from a distance is a challenging task for the owner.
In franchising, the franchisor overcomes such problems by making the owner the manager of the unit. The franchisee is motivated because he invests in the successful operation of the franchise unit. With better management, the profits are higher and the owner wants that. The unit-level performance depends on a combination of factors as follow:
- The franchisee invests and therefore will be hesitant to walk away from the business.
- The franchise is a long-term manager and gains a lot of business knowledge as he runs the franchise unit. He becomes a better operator with passing years.
- The operational ability also improves as the franchisee takes all steps to make the franchise unit presentable.
- Franchisees have a stake in the business which drives them to look for opportunities that improve the business.
- The franchisees have been found to outperform typical managers. There is a 10 to 30% improvement in performance which is significant.
Ease of supervision
Franchising provides additional benefits when seen from the managerial point of view. As a franchisor, one does not have to look after the day-to-day management of the individual units. The financial returns of the franchisor remain unaffected from the decisions the franchisee takes regarding hiring, firing, or other small decisions of the unit. So, supervising all such individual franchise units is much easier with franchisees taking care of most work. The franchisor can, therefore, channel his energy for the overall development of the brand instead of managing every single unit.
Leverage in staffing
Franchisors can work with much leaner organizations. The units are managed by the franchisees so the franchisor can work with reduced staffing. This can save a lot of money too.
Profit increases
A franchise business can run profitably, thanks to the staffing leverage and ease in management. The cost of starting a unit comes from the franchisee. The site selection, lease negotiation, promotion, marketing, advertising, hiring, accounting, and other such operations are looked after by the franchisees in their units. So, the franchisor needs to spend much less on such activities. This way owning a franchise organization can be much profitable as compared to a traditional business setup. The benefits of the franchisor here are the monthly royalty fee from all the franchisees which are a constant source of income for organization development.
Advertising and promotion
With the co-operative promotion of the brand, the franchisor can reach a larger customer base. At the local or regional level, the franchisees take care of the promotion and advertising, so the franchisor can focus on the big picture.
Secondary and tertiary market penetration
The franchisees can generate more profit than a manager. They also look after the expenses of operating the business. The cost structure of the franchisees is different from that of a franchisor. Their units often make good profits even after paying the royalty fee. The franchisor can, therefore, concentrate on the market from which the corporate return can be higher. A franchisor will not want a franchisee to start a business in a market where chances of success are low. So, the franchisor needs not to prioritize the development of the franchise units and can focus on corporate units instead.
Risks are reduced
The risks associated with the business become much less for a franchisor when the responsibility of the franchise units lies with the franchisees. The initial setup cost, cost of hiring, inventory, and other additional responsibilities are for your franchisees. Whatever happens inside the unit is a liability of the franchisee and not the franchisor. The franchisees make decisions regarding location, leases, and other such matters.
Attorneys will also advise the franchisor to act as a new legal entity, thereby limiting the exposure and reducing risks. Franchisors can focus on expanding the business without any huge investment or any big risk.
Valuation improves
With faster growth, organizational leverage, and increased profitability, the franchisor is valued at a higher multiple when compared to other competitors. The reputation of a successful franchisor can prove to be advantageous when one is planning to sell the business.
International expansion
In franchising, expansion of the business beyond the national boundaries can be a much easier task for the franchisor. In traditional business, one might not have this privilege.
Loyalty from customers
A brand gets its popularity from the trust that customers invest in it. Using the system of franchising the franchisors can gain the power of customer loyalty. When the business expands, the number of customers increases and so does the profit margins.
Increase in brand equity
The franchising system works on leveraging off the assets of the franchisees. This opens up a way for the franchisors to grow by owning more shares in the market. Brand equity can also be grown in a much faster and effective manner.
Benefits of IFA membership
IFA or the International Franchise Association is the largest organization for franchises around the world. The purpose of the organization is to maximize the advantages of franchising for the franchisors. The association protects, enhances, and promotes the success of your franchise organization.
Some benefits of being a part of this organization as a franchisor are listed below:
- IFA will take steps to enhance your knowledge, skills, and networks for your organization. Multiple conferences and seminars are held for the franchisors to keep them informed on the latest developments in the field of franchising.
- It plays a major role in elevating the professional relationships you have. There are mentoring as well as networking opportunities that IFA provides to the franchisors.
- The organization offers many certification programs to franchisors to help them build their career.
- The franchisor members are motivated professionals who want to grow their business. IFA offers recognition, exposure, and prominence to help the franchise organization grow. It helps with the franchise sales and development resources every franchisor requires.
Conclusion
Every entrepreneur wants to see his business expand with time and franchising is the perfect way to achieve this. The major advantages of franchising your business are given in this article. The more you understand how the franchising model works, the more you know about the benefits provided to the franchisor. Some disadvantages are there of course, but the advantages outweigh them. If you want your brand to be a leader in the market, then franchising is for you.
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