You may have a successful business and a brand that is growing in recognition. But is franchising necessarily your best next step? Angela Cote advises
Are you thinking of franchising your business? Let me guess! You’ve figured out how to be profitable, business keeps coming, and people are starting to ask, “Hey, are you franchising”? Or perhaps more commonly, people are telling you, “Hey, you should franchise this!”, as if franchising a business is a simple turnkey process.
As a franchise growth catalyst who helps business owners determine whether the franchise model is a fit, I can’t tell you how often it is the customers, friends and family who plant the seed for the idea of franchising.And while I do have an “I ❤franchising” coffee mug sitting on my desk, I don’t think it is always the best way for all small businesses to scale.
Beyond the criteria for whether or not franchising is even a viable growth model, there’s the question of whether it is fit for the particular business. When we get into the reality of the costs of franchising a business, people often reassess, wondering whether corporate expansion may perhaps produce more ROI. However, with corporate expansion you may be missing out on some very valuable outcomes derived from using the franchise model to grow.
So, what do we need to think about when comparing corporate expansion, where there is more control and all of the profits come back to the owner, and franchising, where there is the risk of the franchise partner not following the system, and the owner is only bringing in the franchise royalties (typically a percentage of top line revenue)? Why would anyone give up all of that profit, not to mention control of how the product or service is delivered?
Let’s start with the advantages of franchising.
1. Feet on the ground, skin in the game Probably the number one — and most beneficial — outcome of using franchising to grow is that you have partners in the local market with ‘feet on the ground’ and ‘skin in the game’. Your local franchise partner typically already has connections (usually friends, family and business associates) that he or she can reach out to for everything from patronizing the business to helping with media connections, collaborative partnerships and spreading the word.
Conversely, in corporate expansion, this person will be a manager — someone who may have no invested interest in getting the business off the ground and profitable. It is almost impossible to motivate a manager to care as deeply as an invested franchise partner. Businesses that benefit from the people element, such as restaurants, cafés, salons, pet services, etc., reap the most rewards from having local invested partners, aka franchisees.
2. Faster market penetration – In franchising, rather than having to invest the time, money, and energy to get the business up and running, the franchise partner invests capital, time and other resources. This is a major time saver, assuming you get some help from a franchise expert who can provide support, help streamline processes, create accountability and ensure you don’t make costly mistakes.
3. Creative partners – Ever heard the expression Two heads are better than one? Well, imagine the value of a whole bunch of ‘heads’ with creative, practical ideas for improving operations on the front line. In a franchise, you have the advantage of a collective group of invested partners working together to improve customer loyalty and retention, and ultimately, overall revenue.
By now you probably have a sense of why a business owner would be drawn to using the franchise model to grow. However, there are successful businesses that have grown locally and then internationally using a corporate strategy, such as Starbucks and Chipotle Mexican Grill.
Let’s take a look now at the advantages of expanding with only corporate locations:
1. Less risk/liability – One of the main reasons business owners decide to expand corporately rather than via franchising is that they fear a loss of control over operational systems that have proven successful. It’s a reasonable concern — and it’s exactly why franchising is a highly regulated model. There is a lot of risk and liability for a franchisor (hence the legal costs to develop the proper agreement clearly laying out the expectations for both parties).
Franchise partners give up a percentage of their sales because they are counting on the franchisor to help drive customers to them and support their business needs. This unique business relationship often leads to the franchise partners being the everyday judge and jury of the franchisor. A company with only corporate units can make decisions faster and with less backlash.
2. Show me the money When you expand with corporate locations, you have to put up the upfront investment, but 100% of the profits come back into the business. I see business owners who have access to more start-up capital using the corporate expansion method for this reason. It also appeals to business owners who are open to giving up equity to investors who help fund the growth.
3. ‘Steady Eddie’ growth With corporate expansion, you have no accountability to franchise partners, therefore you can take a little more risk and open new locations at a steadier pace. Many business owners will take a bigger chance on opening corporate locations because they feel confident that they can build up the business in new markets without the added pressure of franchise partners who are counting on them to provide a proven operational system.
In other words, with franchising, it’s critical to do whatever it takes to ensure the business model will produce ROI before bringing in franchise partners, so that franchise partners will see and feel the value of their investment.
Contrary to popular belief, franchising a business is not turnkey. Many business owners come to me excited to explore whether franchising is a good way to grow their concept. My first response is to congratulate them on pausing to assess what growth strategy matches their business — and their long-term goals. Taking the time to get some help to ensure that franchising is a fit is one of the best business decisions they will ever make.
ABOUT THE AUTHOR
Angela Coté is a Franchise Growth Catalyst with Cultivate Advisors, where she helps early and emerging franchisors get clear on the most strategic steps they need to take to grow their business faster with less effort!