Franchising Your Business: Advantages & Disadvantages
Are you considering franchising your business? If so, its important to understand the advantages and disadvantages of franchising your business.
Franchising is a legal and business model designed to achieve multi-unit expansion. Compared to organic expansion where you invest in and open multiple locations yourself, franchising allows you to recruit others – your future franchisees – who will invest their capital, time and managerial effort in establishing new locations using your trademarks, systems and brand. Below we discuss the advantages and disadvantages of franchising.
The Advantages of Franchising
- Promotes Multi-Unit Expansion – The most important advantage of franchising is that allows you to achieve the multi-unit expansion of your business.
- Creates Capital for Expansion – Multi-unit expansion requires capital for the development and operation of new locations. Franchisees will be investing their own capital, including savings, loans and 401K rollovers, to fund the development and establishment of your new franchised locations.
- Supplies Managerial Talent – Multi-unit expansion requires skilled, trained, and motivated. individuals to manage and operate new locations. Franchisees supply the managerial talent needed for new locations and, most important, they have a vested interest in the success of the business.
- Promotes Economies of Scale – Franchising is all about unit expansion and replicating business systems, sources of supply, and uniformity of operations. Franchising allows you to increase your purchasing power and achieve economies of scale with suppliers and vendors. These economies of can even extend to marketing where you and franchisees will be pooling resources and establishing common funds.
- Creates New Revenue Streams – When you franchise you are creating a new business and will benefit from fees and royalties paid to you by franchisees. When franchisees come on board and sign a franchise agreement they pay an initial franchise fee and, on-going, franchisees pay weekly or monthly royalty fees that are typically a percentage of their gross sales.
The Disadvantages of Franchising
- Cost – Even after you invest in franchising your business, on-going, franchising requires that you invest your time and capital. As a franchisor you’ll be entering a new industry and over time you’ll need to invest in your franchise system. Learn more about the cost to franchise your business.
- Regulation – Franchising is a regulated industry and before you can offer or sell a franchise you need to work with a franchise lawyer to develop a franchise offering comprised of a franchise disclosure document (FDD). On-going you’ll need to comply with federal and state franchise laws.
- Franchise Sales are Competitive – Once you franchise your business the next step is to sell franchises to qualified franchisees that have capital. While you may have organic interest from individuals that know your business and want to buy a franchise, long-term, you will need to attract qualified franchisees and this means that you will need to invest in marketing, public relations, and relationships with franchise brokers.
- Less Control – Compared to organic expansion where you own every location, when you franchise you are giving up some control to your franchisees who will own and operate their franchised locations. While franchisees will be required to complete your training and meet your standards and specifications, ultimately they will need to have a voice in your business operations.
- Requires Time – Building up a franchise system takes time and requires time. The success of your first number of franchisees will determine the growth and trajectory of your new franchise system.
Franchising is one of the most dominant and successful business models in our nation. The advantages and disadvantages of franchising, ultimately, must be evaluated based on your specific business, your goals, and your mindset. If franchising is right for you, the advantages of franchising far outweigh the disadvantages. The right expectations and plan is key. Learn more about should you franchise your business.
Call us at (718) 979-8688, by email or web chat to learn about our fixed-fee franchise launch program where we combine legal representation with franchise development know-how to franchise your business.