How Does a Business Become a Franchise?
The typical franchisor begins as a small, locally owned business doing well enough that that it becomes known in their neighborhood. Typically, they start on the path to franchising when a customer asks them how they can open a similar business; this question is often the trigger that results in a new franchisor being born. Over the next few months, the local business owners will work with lawyers, consultants, accountants, bankers, web designers and other professionals to create and develop their franchise system — a very considerable investment of time and money.
For the franchisor, use of a franchise system is an alternative business growth strategy, compared to expansion through corporate owned outlets or “chain stores”. Adopting a franchise system business growth strategy requires less time and direct capital investment.
Franchising is one of the few means available to access capital without the need to give up operational controls. After the brand and formula are carefully designed and properly executed, franchisors are able to sell franchises and expand rapidly across countries and continents.
What are the Advantages of Franchising a Business?
As a proven business model, franchising provides the following benefits for franchisors:
- Quick, less expensive expansion – Franchisees purchase and fund outlets in your chain, which means faster growth and less capital investment.
- Motivated Management – Franchisees tend to outperform management, because they have “skin in the game.” If the business does well, they do well. Id the business does not do well, they don’t.
- Less risky, more stable revenue – Revenue is generated via the operation of many locations, rather than just a single location. Royalty revenue typically includes a percentage of the franchisees gross sales, and/or a fixed or minimum monthly fee.
- Lower costs – training, supervisory and administration staff is required, but no operational staff.
- Higher valuation –revenue is more stable and less risky, resulting in a higher valuation upon sale of a franchisor.