The pros and cons of franchising
Entrepreneurs who have been successful in developing projects wonder if they should sell franchises as a way of expanding their operations. Experts note that franchising, like any other business model, has its pros and cons. As a result, there is no way to confirm whether franchising is the right choice for your company unless you assess the disadvantages and advantages of such model when it comes to your operations. This usually requires the assistance of a solicitor or franchisor, but before doing so, you should first identify the key pros and cons of franchising.
Franchises offer three basic benefits to business owners who want to expand their business
Franchising is a great way to find talented people who can run your business and offer them incentives that motivates them to work hard. Generally, those who are most qualified prefer to invest in business management in exchange for a share of the profits instead of earning a fixed salary as employees. Thus, through franchising, you’ll be able to secure the best talent to boost your business and accumulate more benefits compared to hiring an employee.
Ease of capital increase
Franchising is a good tool when it comes to capital increase; franchisees pay to expand your chain of outlets, which will increase the number of branches affiliated to your business without having to spend any additional capital or to seek funding from banks or investors.
Minimizing risks relating to growth and expansion
Franchising contributes to high financial returns for relatively minor risks. When you grant a franchise, you will pay relatively little money for each outlet that will be added to your chain. If you have a good business model, you will be able to secure high sales at these outlets and your financial returns will exceed the earnings you would have secured if you opened and managed your own outlets.
On the other, franchising has three basic disadvantages that entrepreneurs should know:
Less control over managers
You cannot dictate what franchisees should do, as if they were your employees. Franchisees are independent entrepreneurs and have goals that are different from yours; which can easily lead to conflicting agendas and legal conflicts.
A franchisor earns a percentage of the sales from the franchisee in exchange for using their trade name and operating systems. While franchisees earn money from profits achieved by outlets. Therefore, any activity that increases sales rather than profits, will cause a conflict between the two parties. If franchisors want to offer promotional vouchers to their customers, franchisees are likely to object to this move. Promotional coupons promote sales, but they do not necessarily generate profits, which benefits the franchisor but does not benefit the franchisee.
A relatively weaker business environment
This happens because franchisees always have an incentive to take advantage of one another’s efforts to generate business.
For instance, a franchisee might seek to avoid paying for ads to attract customers assuming that he would attract customers anyway if other franchisees paid for these advertisements.
Of course, if all franchisees make the same assumption, the franchise will not be able to attract any customers; as a result of the lack of any ads. Therefore, it is preferable that all key issues are documented in official contracts.
Innovating becomes more challenging if you are managing a franchise compared to running your own business. If you come up with a new idea and want to implement it, then you have to negotiate with the franchisors to obtain their approval for the launch of a new product or any other innovation you seek to offer your customers. Thus, you will not be able to decide on your own.
Finally, you should carefully consider the pros and cons before discussing with experts the possibility of selling a franchise. Always remember that the key to successful franchising lies in achieving consistency among all parties, and that franchising is not a magic solution to business expansion. If the pros outdo, it can become a great way to grow business and enhance its activities.