smallbusiness.co.uk: Helping your business think big

Many well-known brand names have franchised their company, but there are pros and cons to taking the franchise route to expansion. Here are some of the issues to consider…

Rapid expansion
One of the reasons franchising can work well is because the buyer of the business model (the franchisee) pays to operate under an established brand and uses a proven business system provided by the core company (the franchisor). Essentially, by cloning your existing successful business you can then recruit franchisees to invest in setting up and running these cloned outlets.

Because it costs much less to fund franchisee recruitment, training and support than it does to expand using your own capital, your business can grow more quickly. By nature, though, franchisees are unlikely to stay in your network for life, so your business model will be reliant upon a cycle of attracting and retaining franchisees. That can be a drain on time and resources and adds an extra layer of unpredictability to your business.

Brand image
One benefit of franchising your business is that customers across the country will have a homogenous and consistent experience of your company, since all franchisees in a network operate under the same brand identity and follow the same systems. So, provided your business’ service or product is sufficiently high quality in the first place, this quality will permeate the whole network and customers will hold your brand in high regard and be loyal to it.

However, as a franchisor it is your responsibility to ensure that your franchisees are following your business systems properly and that the brand identity is being conveyed in a consistent manner. If it’s not, you will find it more complicated to rectify the situation with a franchisee than you would with, say, a store manager. To a certain extent you could tell a manager what to do, but a franchisee holds the equity stake in the business and cannot be ordered about! You will need all the negotiating skills at your disposal to remedy the situation amicably. And the matter doesn’t end there. Should you decide to change or update your brand image and operating systems in the future, you will not be able implement this across your franchise network as smoothly you would with a company-managed chain of outlets. Your franchisees have certain rights, as laid down in the franchise agreement, and they may not be willing to implement changes you want, especially if it means they have to invest in new fixtures, fitting and façias, for example.

Bulk buying
A franchise network often purchases from suppliers in bulk and therefore can benefit from group discounts not available to independent businesses. The franchise outlets in your network can therefore compete on price with non-franchised businesses, helping to increase your market share. However, make sure your franchisees are fully aware from the outset whether or not they are permitted to choose their own suppliers independently from the rest of the network. Your franchisees may object to having their choice of supplier dictated by you, so failing to make this clear at the start can create resentment and friction within your franchise network.

Motivated recruits
Franchisees invest their own money in the business, so they have a vested interest in its success. They therefore tend to be more motivated and committed to growing the business than managers on a salary. Franchisee business owners are by nature fairly entrepreneurial in their endeavours and will take that approach to running their franchise outlet, which in turn will benefit your company as a whole by adding drive, fresh ideas and enthusiasm into the mix.

Higher profits
Expanding through franchising uses less of your capital than expanding by opening more company-owned outlets. But remember that you will obviously receive a smaller percentage of the revenue from a franchised unit than you would from a company-owned outlet, as this revenue is split with the franchisee. However, the return on your investment in a franchised unit can be higher. This is because although the revenue coming to you will be lower, a greater proportion of it is pure profit.

Inside information
Franchisees joining your business may well have in-depth knowledge and experience that is expertise to which you might not otherwise have access. This is particularly useful when expanding your business into new geographical areas, including overseas. Recruiting a master franchisee in a particular country to expand the business for you will save time and resources and, ideally, their knowledge of the local market will give you a huge head start.

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