Franchising is when a business owner licenses their brand, operating procedures, and intellectual property to another business owner in exchange for a fee and ongoing royalties. It’s a popular way to expand a business because of various reasons.
The first main reason why people choose to franchise is that it’s a way to spread the risk of expansion. You’re essentially sharing the risk of expanding into new markets by licensing your brand to another business owner.
Another reason why it’s so good is that there are so many successful companies who choose to franchise. Some of the few include KFC, McDonald’s, and 7-Eleven. Lastly, franchising can lead to consistent quality across all locations.
However, there are a couple of reasons why franchising might not be the best option for you and your business. Here are five of them:
You Lose Control
When you franchise your business, you essentially lose control over its operation. The franchisee is the one who will be running the day-to-day operations, so you won’t be able to ensure that things are done exactly as you want them to be done. It can lead to inconsistency across different locations and a decline in quality overall.
Franchising can be a costly way to expand, despite what others tell you. Franchising fees can cost tens of thousands of dollars, not counting the ongoing royalties you’ll have to pay. If you’re not careful, you could spend more money than you ever would have if you had just expanded on your own.
You Might Not Be Ready
Just because franchising is a popular way to expand doesn’t mean it’s right for every business. Unfortunately, most businesses that attempt to franchise fail down the line. An example of this would be Quiznos. They expanded too quickly and ended up filing for bankruptcy in 2014. Preparing for a franchise requires a solid business model that people can reproduce consistently.
An example of a good business model is McDonald’s. This particular franchise follows a specific formula that has been proven to work repeatedly. Essentially, the formula is this:
- Find a good location.
- Build a simple but effective restaurant.
- Sell burgers, fries, and shakes at a low price.
- Have excellent customer service.
It’s not easy to find a formula that works like this, which is why most businesses fail when they try to franchise.
You could argue that the McDonald’s formula isn’t replicable, but the fact is that it has been replicated time and time again with great success.
It’s Not Always Profitable
Just because a franchise is successful doesn’t mean it’s profitable. Many franchises are losing money. One example of this is Subway. Despite being one of the most popular franchises in the world, Subway has been consistently unprofitable for years.
The main reason franchises like Subway are unprofitable is that they have to pay royalties to the franchisor. These royalties can be a significant percentage of sales, which eats into profits.
It’s Also Risky
You’re betting on the franchisor’s success when you buy a franchise. If the franchisor goes out of business, your franchise will likely go with it. This happened with the franchises Planet Fitness.
In 2016, Planet Fitness filed for bankruptcy and closed dozens of locations. This left many franchisees out of luck and without a place to do business.
So, as you can see, franchising is not without its risks. Before you franchise your business, carefully weigh the pros and cons. It might not be the best option for you. Consider other alternatives. The first alternative is merging with another company.
Finding another company in a particular location is far safer than franchising. You won’t have to worry about losing control of your business or paying royalties to a franchisor.
Another advantage of merging is that you’ll be able to maintain a higher level of quality control. Again, this is because you’ll still be running the business’s day-to-day operations.
Lastly, merging is often less expensive than franchising. You won’t have to pay any franchise fees, and you might even be able to negotiate a lower price for the business you’re buying.
If you want to merge with another company, you must first value their business. An experienced business valuation service can help you do this. Once you value their business, you can begin the negotiation process and merge with the other company.
The second alternative is licensing.
Licensing is similar to franchising in that you’ll pay the licensor royalties. However, there are some key differences.
For one, you won’t have to give up any equity in your business when you license it. This means you’ll retain complete control over your company. It’s also often less expensive than franchising. This is because you won’t have to pay any franchise fees.
Lastly, licensing agreements are typically shorter than franchise agreements. You can end the agreement if it’s not working out for you.
If you’re interested in licensing your business, you’ll need to find a licensor. The best way to do this is to search online or attend trade shows. Once you find a potential licensor, you’ll need to negotiate a licensing agreement.
Franchising isn’t always the smart way to expand. Consider the risks and alternatives before you make a decision. Once you choose the right option for your company, you can move forward and grow your business.