franchising aspects Jul, 22 2009

Should you franchise your business?

If you want to expand your business but are short of money, people and time, then franchising could be the best answer.

By Pallavi Majha
Chief Sub Editor
Should you franchise your business?

Before you take a final decision to expand through franchising, it is crucial for you to make an evaluation of your business whether it is franchisable or not.

  • Business needs to be credible with experienced management, track-record over time, success rate.
  • If it is unique, marketable as a business opportunity and can be differentiated from its competitors
  • If it can provide an adequate return

If your business is identical with all the above mentioned pointers than it is definelty suitable for franchising.
The expansion of a business requires capital, manpower and time. Franchising solves all these problems. It allows companies to expand without the risk of debt or the cost of equity. Initially, the investment is done by the franchisee at unit level. Moreover, franchising allows for expansion with minimal capital investment on the part of the franchisor. In addition, since it's the franchisee, and not the franchisor, who signs the lease and commits to various service contracts, franchising allows for expansion with virtually no contingent liability, thus greatly reducing a franchisor's risk.

The problem of manpower that is finding and retaining good managers is served as franchisee himself will take care of the performance of the franchised outlet as he has made an investment and expects profits into it. Thus, franchising allows entrepreneurs to overcome this problem of manpower substituting a motivated franchisee for a unit manager. Also as the franchisor's income is based on the franchisee's gross sales and not on profitability, monitoring unit level expenses becomes significantly less burdensome.

Moreover, other key responsibilities like hunting locations, negotiating rentals and leases, interior designing, securing finance, hiring and training staff,  purchase equipment and inventory, will fall on the franchisee.

Franchise requires less time and a small staff, and is often the fastest way to grow, as it's the franchisee who performs most of these growth tasks. No doubt franchisor provides the guidance, but the franchisee does the groundwork. Thus, franchising not only allows the franchisor financial leverage, but it allows him to leverage his resources as well.

So the key to success in franchising is successful franchisees. Without successful franchisees, no franchise system will last.

Related: Truths and myths of a franchise business

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