Risks and Rewards of Franchising a Business
This is a popular topic that comes up often and is asked by business owners and entrepreneurs who want to franchise their business. If you are evaluating franchising your business, consider the following risks and rewards of franchising.
- Franchising Reward No. 1: Multi-Unit Expansion – Franchising is a business and legal model that allows you to expand and grow your business. When done correctly, franchising allows you to achieve the expansion of your business and brand through the recruitment and qualification of franchisee partners. Franchising allows you to accelerate growth.
- Franchising Reward No. 2: Revenue – As a franchisor you will benefit from an expanding and more diversified revenue stream. That is, as your franchisees established their own franchised locations, you will be generating recurring revenues in the form of royalties.
- Franchising Reward No. 3: Economies of Scale – By expanding your system, as your franchisees expand so will your ability to generate more negotiating ability and economies of scale with key suppliers. Also, depending on how your franchise system is structured franchisees will contribute to marketing and brand development funds that will allow you to better promote and expand your brand with consumers.
- Franchising Reward No. 4: Leverage and Capitalization – As a franchisor you will be leveraging and monetizing the value of your brand, business systems and know how. Rather than just serving your corporate location, these “business” assets will be used by your franchisees who will be contributing their own capital and managerial efforts in expanding their franchised locations and your brand.
- Franchising Risk No. 1: Regulatory Risk – Franchising is a regulated industry and prior to offering or selling franchises you need to ensure that you comply with the franchise laws. Once you comply with the franchising laws, there are advantages to franchising but if you don’t do it right you will have legal and regulatory risk. To learn more about the franchise laws, click here.
- Franchising Risk No. 2: Requires Capital – Like every other business expansion model, franchising requires capital and your investment in developing a franchise system and satisfying your regulatory obligations. Unfortunately there are no short cuts and more often than not any perceived short cut will lead you franchising risk no. 1. To learn more about the cost to franchise your business, click here.
- Franchising Risk No. 3: Selling Franchises is Not Easy – Just because you franchise your business doesn’t mean that you will automatically sell franchises. The process of franchising you business involves more than just the preparation of your FDD – it requires a thoughtful development process focused on your business and your goals.
- Franchising Risk No. 4: Beware of the Franchise Vultures – When I say “franchise vultures” I am referring to all types of potential vendors whether advertising companies, SEO providers, franchise lawyers, PR companies, so called franchise development companies and others who are interested in selling you a bundle of services without having a true belief that you will be on the right path for franchise system growth. The point is to understand who you are working with and to ensure that your franchise development goals are grounded in reality. Also as for client referrals.
- Advantages and Disadvantages of Franchising Your Business
- Mistakes to Avoid When Franchising Your Business