Pros and cons of franchising your business

For business owners looking to grow or scale, there are plenty of ways to go about it. Your company can crank up sales and marketing with a business loan or business line of credit. You could take on a partner who’s willing to invest additional cash. You can also trademark your brand and sell franchises to entrepreneurs. In this article, we’ll discuss how to franchise a business and help you decide if it’s the right strategy for you.    

What is franchising?

A franchise is an agreement between two parties where the franchisor grants the franchisee rights to use their brand. These rights come with certain stipulations, like paying ongoing franchise fees and a mandatory use of the franchisor’s marketing techniques and business model. Many franchisees are looking to invest in a turnkey business operation.

There are several ways to structure a franchise agreement. The franchisor may cover the cost and overhead for the physical location. With an online franchise, there is no physical overhead, but there are costs to maintain an online presence. The terms of either type of agreement can vary.    

Types of franchises to consider

There’s no one-size-fits-all model for franchising, but most agreements fall into one of the following categories. Read this carefully if you’re looking to franchise your business. You should also seek legal help to review your agreement before bringing in franchisees.

Business-format franchising

With a business-format franchise, you cover the cost of the physical location and equipment, along with having operational systems and vendors already in place. As the franchisor, you also provide trainers, marketing tools, and advertising. This type of agreement is common in the restaurant and retail industries, where brick-and-mortar locations are required.

Investment franchising

Some prospective franchisees are looking for a more hands-off approach to owning their own business. Investment franchising involves a capital expenditure and minimal involvement in the day-to-day operations of the business. It’s popular with large-scale enterprises like hotels and restaurant chains that are run by professional management teams.  

Distribution/product franchising

A less restrictive way to own a franchise is to invest in a distribution/product franchise. This is where the franchisee buys the rights to sell your products or services at their own location. An example of this is car dealerships. Franchisees sell brand-name automobiles, but they advertise and market under the name of the dealership.

Job franchising

Franchisees can avoid the headaches of managing employees and a physical location by investing in a job franchise. These are common in the online community and in service industries where one person can run a business from their home. The franchisee pays you, the franchisor, a fee to use your brand and essentially creates a “job” for themselves.  

What’s the difference between franchising and licensing?

The difference between a franchising agreement and licensing is ownership. With a franchise, the franchisee has an ownership stake in the business. A licensing agreement gives someone permission to sell your products or services, without giving them an ownership stake. They can use the brand for marketing, but the licensor retains ownership and can revoke the license if the terms of the agreement are violated.

What’s the difference between a franchise and a chain?

Franchises and chains look alike from the surface, but the business structure for each of them is very different. A franchise may display the same signage and brand as other locations, but they are owned by the franchisee. Chain stores are owned by a corporate entity. Workers and managers at their locations are corporate employees, not franchisees.

Many big-name retailers and fast-food restaurants operate under the chain structure, with corporations rolling out a consistent strategy and execution plan across locations to maintain a smooth customer experience.

Pros of franchising your business

Like any growth or scaling strategy, there are advantages and disadvantages to franchising your business. The following is a list of ways you can benefit by setting up franchise agreements to grow your business:

• Sharing the burden of growth: Growth involves more than just investing more money. There are the burdens of hiring new staff, managing additional product and overhead, and scaling up marketing and advertising campaigns. Sharing those burdens with a franchisee or network of franchisees helps lighten the load and increases your chances of success.  
• More access to capital: Acquiring funding through franchising is a good way to boost your bottom line and increase cash flow. Liquidity is an important aspect of corporate finance that is attractive to investors and shareholders. It also provides additional runway for the future development of your business.   
• Big-picture focus: Franchisees take responsibility for hiring employees and managing their own locations. That allows you to focus on the big picture, which is the long-term success of your business. That additional bandwidth can give you a chance to review systems and processes, investigate new technology, or sell additional franchises.  
• Expanded brand awareness: Your brand is who you are as a business. Branding gets expanded when others buy into what you’re doing and market your brand as franchisees. Franchising can help accelerate growth and take your company to the next level. Embrace that and provide as much support as you can to franchisees to make it successful.  
• Lower risk of failure: Failure (and success) are shared in a franchise arrangement. That makes the two parties dependent upon one another for support, lowering the risk to both. Successful franchises are those that clearly define roles and responsibilities for franchisors, franchisees, investors, and employees. Structure your agreements accordingly so everyone knows how they’re expected to contribute to the business’ growth.

Cons of franchising your business

The advantages of franchising are numerous, but there can also be drawbacks on both sides of the agreement. Awareness of these potential pitfalls can help you structure your franchise agreements to avoid them. Here’s a brief list of what to watch out for:  

• Upfront legwork: Franchisees need to do a lot of upfront legwork to vet a franchise before investing. Franchisors can alleviate some of that burden by being transparent and providing upfront answers to common questions on fees and responsibilities. A chart of how you compare to other franchise opportunities in the industry might also be helpful.  
• Big initial investment: The bigger the investment, the more difficult it is to get buyers for a franchise. You want to make money by franchising your business, but it’s important to set the price at a realistic amount for investors. The initial investment should be set at or slightly above market value so you can compete with other franchises.
• Differing state regulations: Expanding nationally by selling franchises in multiple states is a great way to grow. Unfortunately, every state has different regulations. As the franchisor, you should have a legal team on retainer to review those regulations and ensure that your business remains compliant. Your franchisees should and probably will have their own legal advisors to look out for their interests.
• Lack of complete brand governance: The terms of the franchise agreement should clearly define what franchisees are allowed to do with your brand. But within those terms, you may not have complete control over how franchisees portray and market your brand.
• Risk of legal disputes: Broken agreements can lead to ugly legal battles. That’s just part of the cost of doing business. Hope for the best. Be prepared for the worst. Do comprehensive background checks and a financial deep dive on potential franchisees. That homework might help you avoid sticky legal situations.  

Should you franchise your business?

Franchising your business is not a simple decision. The idea can be attractive because of the potential benefits, but it can also be risky because of the potential drawbacks. Ask yourself the following questions before you make a final decision on this:

• Is your business model set up for growth?
• Are your business systems scalable?
• Do you have the initial capital available to start?
• Can your profitability carry over to franchisees?

Growth and scale might be possible at your current level, but will the systems and processes you currently use easily transfer to a franchisee? If your business is solely dependent on your motivation and leadership, a franchise structure might not work. Brands and systems are franchised, not individuals.

It’s also important to remember that franchising a business takes money, so you’ll need to have capital on hand to launch a franchise program. There are legal costs, as well as marketing, advertising, and possibly new location costs if you’re providing them. That requires profitability on your end and additional profits from the franchisee(s) as they launch.

If you’re confident you have the plan, money, and systems in place to grow this way, your business may be well-positioned to offer franchises. There’s a lot of work to be done after that, but your foundation will be solid. Do some research, invest what you must, and trust your team. That combination, in addition to partnering with the right franchisees, should lead to long-term success.