The main advantages of firms that enter the field of franchising is the capital expansion speed as well as motivated management and risk reduction, but there are other advantages as well.
1. Capital
The main obstacle to growth faced by small-scale businesses today is the not having access to capital. Prior to the tightening of credit in 2008-2009, and that “new norm” that followed, business owners often discovered that their goals for growth were outstripping the funds they could access to finance them.
Franchising, a possible alternative option for capital acquisition provides a few advantages. The principal reason why entrepreneurs choose franchising is the fact that it lets them expand without the burden of debt or the expense of equity. The first reason is that the franchisee is the one who provides the money needed to establish and manage a company which allows businesses to expand by leveraging the resources of other companies. Through the use of money from other people the franchisor is in a way that is not stifled by the burden of debt.
Additionally, since the franchisee and not the franchisor sign the lease and agrees to various agreements and agreements, franchising permits expansion that is virtually free of potential liability, thereby greatly decreasing the risk for the franchisor. That means that as the franchisor, you it is not just that you require much less capital for expansion, also your risk is mostly reduced to the capital you spend on creating your franchise companywhich is usually less than opening a single additional location owned by the company.
2. Motivated Management
Another issue that afflicts many entrepreneurs who want to expand their business is finding and keeping great unit managers. Many times the business owner will spend long hours searching for and preparing an employee, but then they leave or worse be sacked by an opponent. The managers who are hired are employees that may or might not be genuinely committed to their job and that makes overseeing their work from afar difficult.
The franchising system allows the owner of the business to solve these challenges by substituting an owner in place of the manager. Nobody is more enthusiastic than one who is genuinely committed to the performance of the company. The franchisee is an owner , usually by investing his entire savings in the company. His compensation will come mostly in the form earnings.
Combining these elements can have a variety of positive effects on the unit’s performance.
Long-term commitment. Because the franchisee is committed in her business, she’ll have a difficult time walking off her business.
Better-quality management. As an ongoing “manager,” your franchisee will continue to gain knowledge about the business and will more likely to develop an understanding of the business’s structure which will help him become more efficient throughout the many years, perhaps decades, of his life working in the company.
Improvement in operational efficiency. Although there aren’t any particular studies to measure this aspect, franchise owners usually take pride in ownership seriously. They’ll keep their premises clean and educate their employees to be more efficient because they own, and not only run the business.
Innovation. Because they’re invested in the business’s success Franchisees constantly look for ways to enhance their company’s performance. This is something that managers rarely possess.
Franchisees usually out-manage their managers. Franchisees be more vigilant on the financial part of the equation -cost of labor as well as theft (by both customers and employees) and other line item costs which can be cut.
The majority of franchisees outperform managers in general. Over time research and personal evidence have proven that franchisees outperform managers in terms of revenue generation. Based on our experiences that this improvement in performance could be significant, often within the range of 10-30 percent.
3. Acceleration of Growth
Every businessperson I’ve ever spoken to who’s created something truly unique faces the same nightmare of having someone else take over the market by introducing their own idea. These fears are often real.
The issue is the fact that opening just one unit requires time. For certain entrepreneurs, franchising could be the only method to ensure they secure an upper-level position in the market before rivals encroach upon their territory, since the franchisee handles the majority of these functions. The franchise system not only gives the franchisor financial leverage however, it allows it to increase the leverage of human resources. It allows companies to compete against larger companies, allowing them to dominate markets before the larger businesses can react.
4. Staffing Leverage
Franchises can operate efficiently with a smaller organisation. Because franchisees are able to take on a lot of the tasks normally handled by the corporate headquarters Franchising allows franchisors to leverage their efforts to decrease the total staffing.
5. Easy to Supervision
From a managerial point perspective, franchising has additional advantages. One of them is that the franchisor does not have responsibility for the day-to-day management of franchisees. On a micro-level it is the case if leader of a shift or crew member gets unwell at the late at night and calls your franchisee and not you to inform them. It’s the franchisee’s job to come up with a suitable replacement or fill their shift. If they decide to pay wages which aren’t aligned with market trends, employ their family members and friends or make unnecessary or extravagant purchases, it will not affect your financial return or you. Through removing these burdens it lets you focus your efforts to improve the overall picture.
6. Improved Profitability
The flexibility of staffing and the ease of supervision outlined above allow franchises to operate in a profitable way. As franchisors can rely on their franchisees to perform lease negotiation, site selection local marketing, recruitment, training as well as payroll, accounting and various other human resource functions (just to mention just a few) the organization of the franchisor is usually much smaller (and often leverages on the existing organization set up to support company operations). The result is that a franchise business is more profitable.
However, it’s difficult to prove or quantify this claim. We do know this research conducted over the last decade shows that top-quartile franchisors added on average 40 or 45.6 percent on their bottom lines in 2002 and 2001 respectively. What industries do you know that net earnings that are this high are feasible?
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7. Better Valuation
The combination of increased growth, faster efficiency, and greater organization leverage is a factor in the fact that franchisees are typically valued at a greater multiple than other companies. Therefore, when it’s the time for you to dispose of your company it’s likely that the fact that you’re a successful franchisee who has developed a sustainable growth strategy is definitely an advantage.
The iFranchise Group compared the valuation of the S&P 500 against. the franchisees tracked by Franchise Times magazine in 2012 The ratio of the price to earnings of franchise firms was 26.5 and the P/E ratio for the S&P 500 was 16.7. This is an astonishing 60 percent increase over the S&P. In addition the majority of the franchises studied outperformed their S&P ratio.
8. Markets penetrated by the Secondary as well as Tertiary Markets
Franchisees’ capacity to boost the financial performance of their units can have significant implications. A typical franchisee won’t just be able to earn greater revenues than a manager working in the same location, but be able to keep an eye at expenses. Additionally, as the franchisee may have a different structure of costs that you have as an owner of a franchise (she might pay less or not offer the same benefits and benefits, etc. ) It is possible for her to run a business better than you do, even when accounting for the royalty she has to pay you.
As the franchisor, this may allow you to explore markets where the corporate return could be minimal. Naturally, you don’t would want to look at an area that you don’t believe gives the franchisee an excellent chance of successful. If your plan is creating corporate units as well as franchising, it’s likely that your budget for capital development isn’t enough to allow you to establish the number of locations you’d prefer. Franchisees however are able to be successful in opening and operating successfully in areas that aren’t the top priority for development.
9. Reduced Risk
In its own way the franchise model also lowers risks for the franchisee. Unless you decide to arrange the franchise differently (and only a few do) the franchisee takes all responsibility for the capital investment into the franchise including paying for any construction, purchasing all inventory, hiring employees, and assuming responsibility for all working capital that is required for the establishment of the business.
It’s also person who signs leases for vehicles, equipment as well as the physical location. The franchisee also is responsible for all that happens within the unit which means that you’re generally exempt of any responsibility in the event of litigation by employees (e.g. sexual harassment or age discrimination EEOC) and consumer litigation (the hot coffee spilled on the lap of your customer) or any incidents that happen within your franchise (slip-and-fall or employer’s compensation etc. ).
Additionally, it’s highly likely that your attorney or other advisers may recommend that you establish a legal entity to serve in the role of franchisor. This will also limit your risk. Since it is true that the expense of becoming a franchisee typically less than the cost of opening a new location (or opening a new market) the risk of starting a business is significantly reduced.
This combination of aspects will provide you with a significant reduction in risk. Franchisees are able to grow to hundreds, or maybe thousands with a small investments and without spending money for the expansion of their units.