The franchise model gives a business a means to expand nationally or internationally without the financial risk associated with forming a company from scratch. In this post we will look at the reasons why many businesses choose to adopt a franchise model, the advantages and disadvantages and if the model is right for you.
Franchise – Why do it?
Once core business has been established, many companies begin to investigate different opportunities for growth. However, as discussed in previous posts, most growth strategies can be costly and have many financial risks. For example, attempting to establish a presence in a new geographical location can mean a heavy initial investment in premises, staff and additional stock. The franchise model provides a less costly alternative, as all- or most – of the initial costs of starting up a business will be taken care of by the other franchisees.
Advantages and Disadvantages.
There are many advantages and disadvantages to the franchise model. For the franchisees, they are offered the opportunity to run their own company, essentially, as an independent operation, they benefit from associating with an established brand, with an existing consumer base and brand identity. For the ‘parent’ business owner, the advantages appear obvious; a share of the profits, initial revenue, brand extension and lack of financial risk and responsibility. However, as a long term expansion model, there are strategic implications; profitability will be limited and relinquishing brand control to an external person can result in damage to your existing brand.
Is This the Right Model for You?
Before beginning to look for a franchise opportunity, it is vital that you ensure the model is right for your business. The franchise model is not a natural fit for a lot of business for many reasons; you must have an established and recognisable brand and crucially the margins which your business operates on must be sufficiently large enough to ensure a mutual beneficial outcome of all parties.