The Top 6 Advantages of Franchising Your Business
Franchising your business is an idea that many entrepreneurs see as a total win. The advantages of franchising are numerous, and a significant number of businesses are choosing to utilize this model for increasing growth and profitability. And for good reason.
The term “the fastest growth vehicle ever created” is used widely stated among those have experienced the advantages of franchsing and is based on facts as well. A 2018 US government report reveals that the franchise industry employs 21 million people and generates $2.3 trillion in franchise revenue.
What is a Franchise?
According to the Franchise Business Review, “A franchise (n) is a legal and commercial relationship between the owner of a company (the franchisor) and an individual (the franchisee) who is starting a branch of that business using the business’ trademark logos and business model. The franchisee sells the product or service that the franchisor supplies.”
Popular companies that have recognized significant success through the franchising model include restaurants, cleaning services, realtors, vacation rental centers, tool supply services, fitness clubs, and many other service-oriented organizations. Some examples are:
- Little Caesar’s Pizza
- Century 21 Realty
- Jiffy Junk
- Book by Owner
- Planet Fitness
Top Advantages of Franchising Your Business
While many franchising publications list numerous benefits to franchising your business, a careful review reveals that the following six keep appearing near the top of every list.
Access to Capital
The primary reason for any commercial business is to generate income, and franchise revenue is always at or near the top of every list of franchising benefits. In fact, a top reason for choosing to franchise is how the franchisee (the person purchasing a franchise of your business) provides all or most of the capital required to open and operate the franchise.
This allows you to expand your business without the risk of debt or the cost of equity. Your company’s growth is funded by the resources of others, leaving you the freedom to expand with very little, if any, debt. In the majority of franchise operations, the total cost of developing your franchising opportunity is less than what it costs to open a single company-owned branch location.
Very often, the key to growing a successful business is all about timing. Innovation happens rapidly, and although you may have the latest new idea, getting it onto the market and capitalizing on it rapidly is vital. One of the major advantages of franchising is that is allows for accelerated expansion of your company. It is easier to saturate primary and tertiary markets with franchise locations, because the franchisee performs the necessary leverage in terms of finances, personnel, and more.
Therefore, your business enjoys franchise locations popping up more rapidly than if you were opening your own branch locations, and at a fraction of the cost. And, more locations generate more franchise revenue, most of which is not spent on overhead costs but is counted as genuine profit.
A franchisee is not a simple location manager. They have a vested interest in seeing the franchise succeed. It is their time, finances, and effort that is invested into the franchise. It is essentially their own small business. Therefore, they will typically do whatever it takes to succeed. No more training a top location manager only to lose him or her to the competition.
Franchisees are also more motivated to cut costs, innovate, and improve operational quality in their operation. Increased profitability helps them as well as the parent franchise company. The franchisee is possibly one of the top advantages of franchising that drives its overall success.
The very nature of a typical franchise operation means reduced risk for the parent company, always among the top benefits of franchising. The franchisee assumes all responsibility for the initial investment, inventory, hiring, equipment leases, physical property, and all connected liability. This includes possible consumer or employee litigation, workers compensation insurance, and more.
Very often, the parent company will create an entirely new legal entity to act as the franchising operation for the company, even further limiting their exposure. All this means increased risk reduction even as your business grows exponentially.
Another of the often-overlooked advantages to franchising is the increased valuation it builds for your company. Fast growth, high profitability, and significant organizational leverage typically helps franchises to be valued at higher multiples than other businesses. “High multiples” describes the risk factors that lead to a healthy return on investment. These are typically favorable among franchises, making them one of the soundest investments available.
Improved Market Penetration
This ties in closely with the advantage of accelerated expansion above. More than simply expanding rapidly, however, is the opportunity to consider markets that may only appear marginal to other corporate branches. Franchisees, because they assume most of the risk and virtually all the investment, can open and operate a successful franchise in markets other companies won’t consider, allowing you greater market penetration.
A sound franchising operation can catapult your business concept into a worldwide organization. Need more examples? 7-Eleven operates more than 56,000 stores across 18 countries. Subway boasts over 44,000 stores in 111 countries. If you operate a business with multiple locations, or have an idea that will work across many demographics, you may want to consider the advantages of franchising.