Franchising as a means of business expansion
Franchising is an exciting marketing method. When it is properly structured and will run it provides benefits and satisfaction for both parties.
The benefits of franchising as a means of expanding a business are twofold. One, it involves low capital investment by the franchisor as the capital used to expand the network comes from franchisees. Two, by franchising the business, the franchisor places the expansion of his/her business in the hands of people who are motivated to make it work. Having invested what in many cases are their life savings in a franchise, franchisees will strive to make the business successful. Their livelihood depends on it.
By using the franchisees’ capital, the franchisor is able to establish a large number of outlets in a short period of time. Rapid expansion can be achieved without incurring the overheads and costs associated with opening company-owned outlets. This brings benefit to both the franchisor and franchisee as it helps build consumer recognition quickly and establish the franchise.
The cost of expansion for the franchisor is usually limited to the cost of franchisee recruitment, training and assistance prior to opening. Franchisees invest their own equity and borrowed funds in premises, equipment, fixtures, furnishings, inventory and the working capital necessary to establish a franchise unit. The only cost to the franchisor is that of the overheads not met by the franchisee’s initial franchise fee.
The return on investment is much higher for businesses that expand through franchising. Because there is less capital employed, the franchisor’s profits are generated on a much lower capital investment. Although the revenue from franchised units is less than that received from company-owned outlets, a higher percentage of the revenue is profit.
Franchising also allows for the business to expand without spreading managerial resources across too many business units. A business owner may wish to keep his/her own operation small and tightly run. Operating more than a few outlets can drain business resources. A franchise system requires less management than a company owned chain of outlets. Hiring, training, motivating and retaining competent staffing are all functions handled by the franchisee, not the franchisor.
Businesses choose franchising as a means of expanding their enterprise because of the ambition and energy of owner operators and sometimes – especially in the case of small, one-person enterprises – because the service provided by the franchise is very demanding and needs the extra attention of an owner manager. The owner manager is usually more motivated and effective than a salaried manager because he or she has a vested interest in the business.
Franchising has added attraction for expanding a business into foreign markets particularly those that are different, as most foreign markets are, to the franchisor’s home market. By using indigenous franchisees, the franchisor is tapping into local business knowledge which may prove beyond his or her capability to obtain otherwise. People who know the local scene well deal with legal and cultural differences more easily than an overseas company executive would.
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Secrets of Franchising Success
Franchising has become successful around the world and this is evident by three realities.
- No business can remain small indefinitely- either its owners must strive towards increasing the market share, or the business will stagnate and eventually die. This is a fact of modern life that cannot be wished away.
- Expanding a business requires extensive resources in terms of both capital and management capacity. Most small companies are under-resourced on both counts.
- Markets have become increasingly competitive, and never before in history have customers been more spoilt for choice. There is an array of goods and services on offer, most of which are deceptively similar in function and quality. As a result, personalized service has rapidly become the main point of differentiation.
Personalized service is the key of traditional branch operations. No matter how much money is spent on staff training and motivation, personal service rarely thrives in a manager – run environment. This has rekindled a desire for the type of owner-operated business previous generations knew and loved. Instead of emulating the “Kafenio style store” of yesteryear, which offered a limited arrange of goods or services, the business model of the future is expected to confine the best of both worlds. Franchising makes this possible.
To fully understand the power of franchising to create a win-win situation all round, you merely have to consider the following:
- Seen from the franchisor’s point of view, the presence of the owner behind the counter of each “branch outlet” ensures personalized service with a smile.
- The franchisee benefits because membership of a strong network provides the franchisee with access to a reputable brand and bulk purchasing power.
- Customers benefit because they can deal with the local branch of their favourite brand wherever they are, while continuing to enjoy personalized service.
We can say with confidence that as long as the concept of franchising is properly understood and correctly implemented, it creates a classic win-win situation.
Preliminary steps towards Franchising
Becoming a franchisor leaves little margin for error. Once you are established as a franchisor and franchisees have joined the network you are effectively locked into a partnership. Your continued success will depend on the success of your franchisees and visa versa.
The moment you encourage others to invest in your concept, you assure a moral if not a legal obligation to make your concept as foolproof as possible.
By becoming a franchisor, you will be forced to “let go” of the business you are in. From now on, you’ll be a purveyor of business opportunities.
If you are ready to proceed you will need:
- To create the franchise infrastructure
- To draw up a franchise profile
- To prepare a training plan for franchisees.
- Finalise all financial aspects of the franchise and then prepare the franchise package consisting of the following:-• Operations and procedures manual
- The franchise agreement
- The disclosure document
- Marketing the franchise
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Funding the Franchise
For those who decide to build their business through franchising, one of the biggest obstacles is the added cost and the level of funding required at the initial stage. Anyone who is considering growing their business through franchising should give full consideration to the following cost items:
a) The pilot operation
The franchisor must have operated a successful test operation before franchising the business. Funds will be required to do this.
b) The operating manual
A thoroughly prepared operating manual must be written before franchising commences. This will certainly involve a considerable period of time and may also require an input from a consultant and/or other/s with appropriate expertise.
c) The franchise agreement
Whilst the franchisor will set out the terms of the franchise agreement, a lawyer must be retained to fine tune it and constitute it as a proper legal contract.
d) Promotional material
The writing, design and printing of a range of good quality promotional material for the franchise pack for prospective franchisees must be funded.
More than all the above, perhaps, is the quantity of management time that must be dedicated to the development of the franchise concept. Apart from the franchisor’s own time, additional management resources and a strong team will be required to provide back-up and support for the franchisee network.
