Running a business is never a straightforward process, and business owners often go to great lengths to ensure the success and productivity of their brand. Entrepreneurs employ various success strategies, from improving a brand’s online visibility through Google to effective branding and marketing.
In recent times, however, individuals seeking to break into the world of entrepreneurship are increasingly likely to start a franchise business. What makes franchising such an innovative growth strategy? Let’s explore the many ways a company can benefit from this approach.
What is franchising?
Franchising is a well-known business growth strategy that delivers fast growth with reduced risks. For this strategy, a franchising business, referred to as a franchisor, licenses its copyright, trademark, expertise, and business model to smaller companies called franchisees. These smaller businesses then adopt both the business model and the franchisor’s brand and operate in new markets.
It should be noted that the franchisee adopts the business model in a support capacity rather than the original model. Nevertheless, this partnership can lead to an increase in market share, revenue, and brand recognition.
How does franchising work?
Franchising has become a prominent strategy employed by some of the biggest businesses globally, but there is a lot of work involved in succeeding. It is a long-term collaboration, and both the franchisor and franchisee seeking success must understand the nature of this partnership and their individual responsibilities.
To begin the partnership, a franchisee must pay annual fees and remit a percentage of their sales. In return, they typically receive:
- Operational instructions
- A new market
- A startup package
- Consistent national or regional support
- Trademark license
This introductory package comes with a franchise agreement. However, depending on the agreement’s details, a franchisee could receive a lot more, especially for manufacturing businesses.
Although this strategy has proven effective in many cases, it remains inappropriate for some businesses. Therefore, it’s necessary to consider your business type and identify whether a franchise would be the best option. Here are some well-publicized business characteristics that make franchising less than ideal:
- A business that delivers products or services with a short-term market
- A company that serves a small niche market that only exists in a lean geographical area
- A business with low gross margins
- A business that thrives more on customer loyalty than the business brand
- A business under strict regulatory legislation that could potentially create a challenge for franchisees
- Businesses attempting to operate as a separate legal entity
- A company looking to solve cash flow issues with a franchise model
- A company with limited capital and access to credit
How franchising can benefit businesses
If you have a business that runs on an effective process for consistent production and delivery and has a proven track record and broad appeal, here are some reasons franchising might be the best expansion strategy for your business.
The top issue faced by small businesses looking to expand is a lack of adequate capital. In a business context, only a few things are worse for an entrepreneur than not having the ability to fund expansion plans.
However, business owners can take advantage of franchising as an alternative form of capital acquisition. Franchising allows businesses to expand while eliminating debt or equity cost risks.
The absence of any lease commitment by the franchisor means they are also protected from significant risks. A franchisor’s risk is limited to the capital invested in developing a franchise company, which is often more cost-effective than establishing an existing company branch.
The importance of management to a business cannot be overstated. Big companies can attract the best personnel for management positions, although it’s much harder for smaller businesses to find and retain good managers. Very few managers are genuinely committed to their jobs, and it is not uncommon for high-quality managers to leave smaller businesses for more prominent competitors.
This is another aspect that franchising helps address by making a business owner the manager of the franchise company. A business owner can more effectively manage other processes when they do not have to worry about certain expansion aspects, such as funding.
Entrepreneurship is very dynamic, and it is not unusual to have competitors beat you to an expansion idea, regardless of how novel it is. For one, many factors determine the expansion rate, and franchising might be the only effective way to capture a market before competitors.
In addition to the financial leverage, franchising offers small businesses, it allows entrepreneurs to tap into quality human resources. Unsurprisingly, franchise companies can compete with larger-scale businesses and influence a market before their competitor, leading to rapid growth and expansion.
When a business’s rapid expansion rate is combined with increased profitability and organizational leverage, it is primed to be valued higher. Franchisors often have a better valuation than other businesses, which is an important factor when the time comes to sell the business.
Having recognized franchising as an effective growth strategy, the transition from a business owner to a manager is never easy. Therefore, business owners must be able to adapt to an ever-changing labor force. New technologies redefining the future of business have made it expedient for professionals to earn an MBA to gain a competitive advantage.
A Masters in Business Administration is an effective strategy for helping professionals gain considerable in-demand skills while also exposing them to numerous MBA-careers. Institutions such as Aston University offer online MBA programs for professionals who wish to acquire advanced m
anagerial skills relevant to enhancing decision-making, analysis, and strategic thinking.
Combining relevant managerial skills with effective strategies such as franchising can substantially improve your business. By aligning yourself with an established brand, you can gain access to their resources, knowledge, and customer base.