The most significant advantages for firms that enter the field of franchising is capital expansion speed as well as motivated management and risk reduction. However, there are many other benefits too.
1. Capital
The biggest obstacle for expansion that small-scale businesses today is the not having access to capital. Before the credit tightening of 2008-2009, and that “new norm” that followed, entrepreneurs frequently found that their goals for growth were outstripping their capacity to finance them.
Franchising, a possible alternative method of capital acquisition has its advantages. The main reason that entrepreneurs opt to franchise is the fact that it permits them to grow without the burden of borrowing or paying for equity. In the first place, because the franchisee has all the money needed to establish and run a business which allows businesses to expand by leveraging the resources of other companies. With the help of other people’s funds the franchisor is in a way that is not stifled by the burden of debt.
Additionally, since the franchisee and not the franchisor is the one who signs the lease and agrees to various agreements and agreements, franchising permits expansion without a significant risk of liability in the event of an incident, thus decreasing the risk for the franchisor. That means that as the franchisor, you in addition to the fact that you require much less capital for expansion, also your risk is restricted to the amount you put into the development of your franchise business -which is usually less than opening an additional corporate-owned location.
2. Motivated Management
Another obstacle that is a major issue for entrepreneurs looking to expand their businesses is finding and keeping good unit managers. Many times the business owner will spend long hours searching for and preparing the new manager only to have them go or, even worse being hired by an opponent. Managers who are hired are employees who might or may not be genuinely committed to their work so supervising their work from afar an issue.
However, franchising can allow entrepreneurs to address these challenges by substituting an owner with a manager. Nobody is more enthusiastic than one who is committed to the business’s success. The franchisee is an owner , usually with the savings of his entire life in the venture. The compensation for him will be mostly in the form of earnings.
Combining these variables will result in positive impacts on the performance of units.
Long-term commitment. Because the franchisee is committed and committed, she’ll have a difficult time walking off her business.
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 more efficient over the course of many years, perhaps decades, of his life working in the company.
Improvement in operating quality. Although there aren’t any specific studies that quantify the quality of this factor, franchisees generally take pride in their ownership seriously. They’ll keep their premises tidy and make their employees to be more efficient because they own, not oversee, the company.
Innovation. Since they are invested in the business’s success Franchisees constantly look for ways to improve their operations — an attitude that most managers do not have.
The majority of franchisees outmanage managers. Franchisees be more vigilant 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.
Franchisees generally outperform managers in general. Over time both research studies and anecdotal evidence have proven that franchisees outperform managers in terms of revenue generation. Based on our experiences that this improvement in performance could be significant, usually within the range of 10-30 percent.
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3. Rapid Growth
Every entrepreneur I’ve met who has created something that is truly original faces the same nightmare that somebody else will outdo them with their own ideas. The majority of these fears are grounded in reality.
The issue is the fact that opening just one unit requires time. For some entrepreneurs, franchising might be the only option to ensure they secure an advantage in the market before rivals encroach upon their market, as the franchisee is responsible for most of these duties. It not only grants the franchisor financial leverage but it also lets it increase the leverage of human resources. It allows companies to compete against bigger businesses, which means they are able to take over markets before other businesses can react.
4. Staffing Leverage
Franchises can operate efficiently with a smaller structure. Because franchisees are able to take on a lot of the duties normally borne by the corporate headquarters Franchising allows franchisors to leverage this approach to cut down on the total staffing.
5. Facilitation of Supervision
From a management point of the perspective of management, franchising offers additional advantages. One of them is that the franchisor doesn’t have to be accountable 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 during the mid-night the franchisee will call (not you)to inform them. It’s the franchisee’s job to come up with a suitable replacement or fill their shift. If they decide to pay wages that aren’t in keeping with market trends, employ their relatives and friends or invest money in unnecessary or extravagant purchases, it will not affect your financial return or you. Through removing these burdens it lets you 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. Because franchisors are able to rely on their franchisees to perform lease negotiations, site selection local marketing, hiring, and training and accounting, payroll and other human resources tasks (just to mention just a few) The franchisor’s company is usually much smaller (and frequently leverages the existing organization set up to support company operations). This means that a franchise business is more profitable.
However, it’s difficult to prove or quantify the validity of this assertion. 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. Which industries do you know which net profits within this range are feasible?
7. Better Valuation
The combination of faster growth, higher efficiency, and greater organization leverage is a factor in the fact that franchisees are typically valued at a higher value than other companies. When it’s an opportunity to market your company and you’re a successful franchisor who has created a scalable growth strategy is definitely an advantage.
The iFranchise Group compared the valuation of the S&P 500 with. the franchisees tracked by Franchise Times magazine in 2012 The average ratio of price/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 an astonishing 60 percent increase over the S&P. Furthermore the majority of the franchises studied outperformed their S&P ratio.
8. Markets penetrated by secondary and Tertiary Markets
Franchisees’ ability to boost the financial performance of their units is a significant factor. A typical franchisee won’t only generate more revenue than a manager working in an identical location, but be able to keep an eye at expenses. Additionally, as the franchisee may have a different structure of costs that you have as an owner of a franchise (she might pay less and may not offer the same benefits and benefits, etc. ) In many cases, she will be able to run a business more profitably , even after taking into account the royalty she has to pay you.
As the franchisor, this may allow you to look at markets where the corporate return could be minimal. However, you shouldn’t think about an area that you don’t believe gives the franchisee the best chance of successful. If your plan is creating corporate units as well as franchising, it’s likely that your budget for capital development will not allow you to open more locations than you’d prefer. Franchisees however can succeed in locations that aren’t top of your list for development.
9. Reduced Risk
Because of its nature the franchise model also lowers chance for the owner of the business. Unless you decide to arrange the franchise differently (and very few do) the franchisee takes all responsibility for the capital investment into the franchise including paying for any construction, purchasing all inventory, hiring employees, and assuming responsibility for all working capital that is required to start the business.
Franchisees are also the person who signs leases for automobiles, equipment as well as the physical location. It also is responsible for the actions that occur within the unit which means that you’re generally exempt of any responsibility in the event of litigation by employees (e.g. sexual harassment and age discrimination EEOC) or consumer lawsuits (the hot coffee that spilled onto the lap of your customer) or any accidents that occur within your franchise (slip-and-fall and employer’s liability and so on. ).
Furthermore, it’s likely that your lawyer and other advisers may recommend that you establish a legal entity to serve in the role of franchisor. This will also limit your risk. Since being a franchisor typically less than the cost of opening a new location (or the entry into a different market) Your startup risk is greatly diminished.
Combining these aspects gives you a significantly lower risk. Franchisees are able to grow to hundreds, or maybe thousands, with minimal investments and without spending money to expanding their business.