I have met many business owners over my decade plus of experience of working with small businesses in various capacities. I thought of penning down this articles since many consultants actually give bad advice to business owners about growing their business through franchises.
While it may sound very attractive to outsource the hard work of marketing and sales to others and to give you a royalty, its much harder than you think to scale a business successfully through franchises.
Lets go through some of the key areas that all small business owners must be aware of before seriously evaluating franchising options. Before that, lets understand some basic terms so that all of us are on the same page.
Franchisor: The franchisor owns the overarching company, the brand, and the business system. They are responsible for developing and maintaining the business concept, brand image, products or services, and operating systems.
Franchisee: The franchisee is an independent third party that pays to use the franchisor’s brand and system. They typically pay an initial franchise fee and ongoing royalties, which are a percentage of their revenue or a fixed periodic amount.
Franchise Agreement: This is a legal contract between the franchisor and franchisee. It outlines the rights and responsibilities of both parties, including use of the brand, operational guidelines, financial obligations, duration of the agreement, and terms for renewal or termination.
Business Model: Franchisees operate under the franchisor’s business model, adhering to specific guidelines and standards. This includes using the franchisor’s trademarks, logo, and business system, and selling the franchisor’s products or services. The franchise model also looks into the business model to construct profit and revenue sharing terms while penning the franchising agreement.
How can a small business start growing using the franchise model as a strategy for expansion?
Franchising allows small businesses to grow their footprint quickly. Since franchisees figure out their own financing, the franchisor can expand without the significant initial investment typically required for opening new locations. Franchises can recruit experienced business owners who are already operating in their industries whioch can further aid businesses in their growth.
There are multiple factors that a small business must evaluate before taking the plunge. Lets look at some of these aspects and any mis-step can put your business at risk and you can lose a lot of money and end up with unnecessary legal hassles.
The first and foremost check should be that you, as a small business have enough cash being generated through your business operations. Getting into franchising is not easy. Your brand has to be strong, you will have to market it and spend a lot of time on due diligence on the right franchising partners.
Some key points each small business owner who is considering franchising has to keep in mind are
- Evaluate Readiness and Fit of the business model
- Marketing and Recruitment of Franchisees, the budget and effort you are willing to put in
- Selecting the Right Franchisees, make sure that values and goals are aligned
- Training and Ongoing Support once franchises are set up, you cant be hands off
Advantages and Disadvantages of growing through franchising for a business
The following table compares the advantages and disadvantages of growing through franchising based on various parameters.
| Advantages of growing via franchises | Disadvantages of growing via franchises |
| Rapid Expansion: Franchising allows the business to expand quickly and wider than they could on their own | Control Issues: Franchisors have less control over franchisees than they would over company-owned outlets. Bad management at one franchise can negatively impact the overall brand |
| Reduced Cash Requirement: Since franchisees finance their own outlets, the franchisor’s capital and resource requirements are significantly lower compared to expanding through company-owned outlets | Complexity and Legal Compliance: Franchising involves complex legal arrangements and regulatory compliance, including drafting and enforcing franchise agreements and preparing Franchise Disclosure Documents (FDD). This has potential to add a lot of overheads and unnecessary legal tangles for the business |
| Risk Sharing: The financial risks associated with opening new locations are largely borne by the franchisee business, reducing the risk for the franchisor, if a location goes wrong, the franchisor does not bear the consequences, its the franchisee who bears the losses | Conflict Potential: There can be conflicts between franchisors and franchisees, especially over issues like operational independence, royalty payments, and contractual obligations for the franchise |
| Local Market Insight: Franchisees often bring valuable local market knowledge, which can help in adapting the business model to fit local preferences and conditions | Profit Sharing: While franchisees contribute to the brand’s growth, they also keep a significant portion of the profits, this will be less financially rewarding for the franchisor compared to owning all outlets and can be a source of conflicts |
| Revenue Streams: Franchisors benefit from multiple revenue streams, including initial franchise fees, ongoing royalties, and potentially from selling products or supplies to franchisees. | Dependency on Franchisees: The success of the franchise model heavily depends on the franchisees. Selecting the wrong franchisees can lead to operational and reputation issues |
Once you consider all these factors, its fairly obvious that as a small business owner you should evaluate strongly if you will continue to be in a position of strength as you look to expand using the franchising model.
What are the key factors a business should consider when making a franchise decision about expanding into new franchises?
Taking a decision to grow your small business via franchising is a strategic decision. You will have to be fully aware of what you are getting into a franchise since if its not managed well or if enough time is not given, it can become a headache and end up derailing your business.
With that said, lets take a look at some of the key factors you should go deep before taking the decision to hand over your business to a franchise.
- Brand strength and recognition – your brand should be strong and have a good recall in your industry
- Business model replicability – your current business model should be replicable with processes and systems and the franchise should not be solely dependent on you as a business owner to run it
- Financial stability – your business should be financially strong and should generate sufficient cash to withstand any of the headwinds
- Ability to set up franchise support systems – How comprehensive system can you set up? you should support training, operational guidance, marketing, and provide ongoing assistance
- Long-term strategic fit – are your values and those of your franchisee aligned, do you want the same thing for the business and for customers?
Once you have thought through all of these and have a robust execution plan in place, only then should you consider the next steps.
What factors should a small business consider before entering into a franchising agreement to ensure it doesn’t set them back financially?
As a small business owner, you should have a legal counsel who is experienced in crafting franchise deals which protects the interests of small business owners. With that said, I would like to list out some critical aspects that small business owners should be aware of before they get into any franchising agreement.
- Initial franchisee costs – are there any clauses that require you to share costs upfront?
- Fees and royalty structure – Check if the structure works out for your business and see if its worth the effort
- Financial projections, business plans – evaluate all the assumptions put in with your experience of running the business, ensure that it is as real as it gets. There is no point in making aggressive financial projections on paper to fall short in actual execution. It will only lead to discontent.
- Franchisee’s track record – look at the other business that have franchised successfully, speak to the business owners if possible to understand the deal they got
- Exclusivity, territory rights – ensure that these are mutually aligned and that each operator has a non-competing region which allows consolidation of revenues and profits
These are some of the critical aspects that each business owner should keep in mind while looking at a franchising agreement
How could a business determine if it is franchise ready and if adopting a franchise model is the right strategy for its expansion?
There are some signs for a business owner which indicate that he is ready to grow his business through franchising. Typically, a business owner should have evaluated an organic growth approach before evaluating a franchise option. Franchising can be an efficient way of growing your business once all options are exhausted.
To get into the details, here are some must-evaluate parameters that business owners must look at
- Proven business concept – does your business model work and generate sufficient cashflow, a franchisee will be interested in generating cash for himself too
- Is your business model replicable – you wont be around to run the franchise, can systems and processes replicate what you do?
- Is your brand strong enough – Do people in your industry or geography recognise your brand and have positive recall?
- Do you have systems in place – do you use technology in your processes that can scale to multiple locations?
- Training and resourcing – can you provide training and standardisation to multiple outlets so that your SOPs are maintained?
- Partners who can help assess – do you have experienced business partners who can help you assess and select the right franchisee?
- Back up plans – do you have a back up plan in-case your franchising experiment fails? do you have legal, financial and operation back-ups?
Once you have these details ironed out, you will be in a much better position to craft an agreement that is in your best interest and enables the franchisee to benefit as well while taking your product or service to market.
How should a company decide which franchises to invest in for optimal business growth?
As a small business, choosing a franchise partner is critical to success of your company. You need to look at many factors to decide what is the best way forward to grow with franchises. You should undertake a comprehensive evaluation process to ensure that the business selects franchises that align with its goals, values, and growth potential. Franchisees must pay an initial franchise fee to the brand to be eligible to start operations.
Some of the critical steps to take are below
- Industry analysis for potential franchisee opportunities – look for alignment of values, reputation and resilience in the business
- Brand reputation – look for franchisees who have a reputation in the market and are associated with successful brands
- Financial performance – Franchisees who have grown successfully and have low leverage have an innate well run practice which you as a business will benefit from
- Costs and investments – The financial capacity of the franchisee to absorb initial investments required to grow or expand your business
- Territory control – look at the territory that the franchisee controls and if it overlaps with where your target audience is
- Growth potential in the long term – can you trust the franchisee to do the right thing, will they protect your brand as much as you will, can you grow with them over the long term?
Once you seek answers to the above factors, you will be much better placed to evaluate a franchisee for your small business.
Does franchising really help your business grow?
This is the final piece of the puzzle, does franchising your brand really help your business grow? The answer to this lies in clear execution of your strategy and the level of preparation you put in before taking up this route to expand your business.
As a small business, I would definitely not recommend franchising, till you are able to successfully solve for the below factors that can become obstacles to your business.
- Premature expansion – are you growing too fast? Have you maximised your potential within the realms of what you can do. You need to have an honest answer to this question
- Insufficient support systems – If you as a franchisor is unable to provide adequate support, training, and resources to franchisees, this can lead to poorly managed franchises
- Lack of control and consistency – If you fail to enforce brand standards and operational consistency, it can lead to a varied customer experience, diluting the brand and harming your reputation
- Ignoring market fit – Make sure that the franchisee is able to address your target markets requirement as well as you have been able to
- Conflict with franchisees – Improper communication, poor of support, or unfair practices can lead to conflicts with franchisees, potentially resulting in legal disputes that can cause irreparable damage to you.
Only once you have got solves for these issues, should you seriously consider to grow your business using the franchise model.