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Franchising is a business relationship in which you (the franchisee) pay the owner of a business (the franchisor) for the right to market and distribute their goods or services over a fixed period.
Buying a franchise can be a smart move, particularly if you haven’t owned a business and have no experience being self-employed. Ideally, franchising secures an established brand for a product or service. It provides a proven business model and marketing system, which reduce typical start-up risks. Most franchisors also provide ongoing training and support.
If you consider owning a franchise as an option to start your business, there are several benefits from this option, such as:
- Low failure rate
When you purchase a franchise, you are buying an established concept that has been successful. Statistics show that franchises have a much better chance of success than independent start-up businesses.
- Business assistance
Franchise owners receive valuable assistance throughout the life of their business. Many franchises are, in fact, turnkey operations. When you buy a franchise, you receive all of the equipment, supplies, and instruction needed to start your business. In many cases, you receive ongoing training and help with management and marketing. For example, your franchise will reap the benefit of the parent company’s national marketing campaigns.
- Buying power
Your franchise will benefit from the collective buying power of the parent company, which passes on the savings to franchisees. Thus, inventory and supplies cost less for a franchise than for an independent company.
- Start power
Many well-known franchises have national brand-name recognition. Owning a franchise is similar to buying a business with built-in loyal customers.
- Profits
A franchise business can be immensely profitable. As expected, the most proven, popular franchises, such as McDonald’s and Tim Horton’s, tend to have much higher franchise costs but are more likely to generate high returns on investment (ROI).
In the other hand, if you decide to franchise your business, there are several advantages on entering the realm of franchising, such as:
- Capital
The primary reason most entrepreneurs turn to franchising is because it allows them to expand without the risk of debt or the cost of equity. The franchisee provides all the capital required to open and operate a unit. It allows companies to grow using the resources of others. By using other people’s money, the franchisor can grow largely unfettered by debt.
Moreover, since the franchisee signs the lease and commits to various contracts, franchising allows for expansion with lower the risk to the franchisor. This means that as a franchisor, not only do you need far less capital to expand, but your risk is largely limited to the capital you invest in developing your franchise company.
- Motivated management
It is easier for franchisors to hire, train, and supervise their managers by substituting an owner for the manager. Your franchisee will be an owner and no one is more motivated than someone who is materially invested in the success of the operation.
- Increased name recognition
As additional locations are opened through franchising, name recognition increases. Consumers typically feel more secure on doing transactions with recognised business. For the independent business person, it has become difficult to compete against companies that have significant resources to develop and promote their brand. Franchising permits an individual to benefit from the collective power and growth of the franchise network, which in turn leads to greater name recognition and competitive advantages for each individual franchisee. Therefore, franchising allows companies (franchisors) to ensure they capture a market leadership position before competitors.
- New revenue streams are created
Franchisors earn revenue from many sources, including:
- Franchise fees
- Franchise royalty fees
- Advertising and marketing administrative fees
- Services provided to Franchises
- Sales of products & supplies
- Training fees
- Sales of promotional items
- Rebates from suppliers
- Greater buying power
Franchisors that purchase products and services for their franchise network can often negotiate volume discounts from vendors and suppliers. Sharing a portion of the saving with franchisees provides higher operating margins and a competitive advantage over other similar businesses. This is a key benefit of franchising that is often overlooked.
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