Nazeer Daud asked:
If you are looking to start a business using the franchising model, then there are certainly lots that you have to consider before hand. It’s also, probably, wise to consider consulting with a suitably qualified specialist. Franchising is a model used by many large businesses, including Subway and McDonald’s, which has inevitably contributed towards their rapid expansion and global presence.
Doesn’t Dilute Equity
When you finance the growth of your business through franchising it allows the existing shareholders to maintain a greater share of equity within the firm. This means that going forward they can run the business in a way that they see fit, and capitalize on opportunities when they arise.
Your business will be able to scale much quicker when you opt for the franchising model. Each time you enter into new markets, and sell more franchises, your balance sheet will become stronger through franchising fees. This is in comparison to other businesses, where they will often have to heavily leverage their business or dilute equity to finance this.
Dependant on the structure of your franchise agreement it is unlikely you will be able to make a gross loss from selling a franchise in any giving trading year. Most franchisees pay a yearly management fee to the franchisor, which is a percentage of revenue. This means even if one particular franchise is not profitable, this will not impact the business as negatively as it otherwise would. This makes the business far more stable, with more predictable earnings than most companies.
It is likely that each franchise will be well managed when the owner is so closely vested in its success. This allows for your business to worry about micro-managing less, and worry about long-term strategy more. It also means you will most likely have higher caliber management in place than you otherwise would.
Cannibalization Less Problematic
If two McDonald’s franchisees open restaurants near each other then it will probably benefit the parent company. Not only do they benefit from the initial fee from both companies, but they also benefit from the increased revenue brought by their wider reach.
Although this may benefit McDonald’s in this case, if they owned the stores directly they may find that they were competing against each other for the same business. This means that total revenue would be higher, but profitability would take a hit. With business franchising, your business becomes immune to this.
Through making the franchisee responsible, as directly as possible, for the costs that they bring to your business it’s possible to drive efficiency within your business in a way that wouldn’t otherwise be possible. If one franchisee is using up more head office resources than you would like, there expenses can reflect this.
Economies Of Scale
Because you will be able to reach critical mass much faster than you otherwise would, it means that expenses can be shared out among a larger organization. For example, when the business pays for a new product design everyone benefits. This makes the business more cost efficient.