5 arguments for expanding by means of franchising. From the franchisor’s perspective.
1. Lesser capital needs
An expansion almost always results in higher capital needs. Supply, inventory, accounts receivable and initial costs tie up capital and cost money. In a franchise, it is generally the franchisee who invests. In this way, the franchisor avoids unnecessarily high employment of capital.
2. Shared risk
The inherit risk when expanding with franchisees can be separated into two parts. The purely financial risk is primarily taken by the franchisee. It would be the franchisee’s company that suffer the immediate losses were the business to achieve a negative result. Although it is not uncommon for franchisors to have taken some hands-on financial risk. Such as supplier’s credit or IOU’s etc.
Quite set apart from the the financial risk, the franchisor does takes a substantial commercial risk. A bankruptcy on part of the franchiee is a very clear commercial disadvantage for the franchisor. It is a disadvantage when recruiting and financing new franchisees. As a result, suppliers can lose customers which in turn negatively affects the chances of reaching favourable terms between suppliers and franchisors.
There is evidently an element of risk for the franchisor as well. Sharing the risk with the franchisee is a common argument in favour of franchising.
3. Quicker expansion
The rapid rate of expansion is often cited as an argument in favour of franchsing. It relies not only with the Franchisor avoiding unnecessary capital binding, but also on using the often unparalleled ambition and zeal of a newly started business. The motivation that is present in the budding business is an unsurpassed force. This force is carries the business through the initial establishing phase and is difficult or impossible to instil in an expansion with filial companies and employees.
4. Local motivation. Opportunity and risk
The general consensus is that a self-employed businessman has a higher degree of motivation than an employee. The self-employed has an incentive in the form of the possibility of increasing her profits. This is well and true, but only part of what constitutes the motivation.
The possibility of earning more money can be included in a employer-employee relationship as well. However, the risk of losing money is unique to the businessman and not possible to incorporate into an employment.
The Financial risk is ever present in business and not only for the businessmen but also to their families. This means that the pressure on the businessman not to fail is present even outside work. It is therefore not difficult to consider the risk-taking as part of the motivation.
The financial risk consists in losing the capital put into the company as well as the securities for the company’s loans. Withal there is the risk of loss of income during the time which the company cannot afford to pay the businessman, which is common regardless of whether the business is started as a franchise or entirely on its own.
Most who become self-employed businessmen have a very strong will to ‘make it’. What ‘success’ means varies from person to person. It is not only measured in money, even though it is part of the equation. In whatever way one defines, to be successful and to ‘make it’ gives as sense of satisfaction and pride that is not to be underestimated as a motivating force.
The other edge of the sword is of course the risk of failure. To fail in ones enterprise perhaps even put the company into receivership is terrible thought. Many view bankruptcy as the definite failure.
The combination of the possibility for success and the risk of failure are the two main components of motivation in independent business. This is also true of businessmen within franchise chains.
5. Effective division of work generates less overhead and less risk
Expanding through franchising does not result in expanding the central administration. To the contrary, franchising offers an opportunity to expand without constructing an elaborate overhead.
The pre-condition is that one clearly identifies the division work between franchisor and franchisee from the utmost start.
The division made on two principles. The franchisee attends to issues that require daily presence and insight into everyday details. The franchisor attends to issues that can be done for many at the same time. This division of work enables the franchisor to expand with a smaller central administration.