I have attended many talks on why business owners should consider franchising their business and business owner aspirants should consider franchise in starting their own business. I have also at times given talks on the same topics but those sessions are normally limited by time and most of the times are very brief to the points. Here, I hope I can give a better picture of the benefits for existing and potential business owners to consider franchise as an option.
In the last issue I talked about the general definition of franchise and the 3 elements that has to be in for it to be called a franchise – identity, system, and return. The franchisor allows another party (franchisee) to use its identity (brand name), and have access to its system (trade secret). The franchisee will have to pay something in return (franchise fee and royalty) to the franchisor. In this issue, we will discuss why these two important parties – franchisor and franchisee, want to be in such an arrangement?
Human, generally have the nature of wanting to have the control over his or her own destiny. There lie the questions of the 3 elements for people to go into a franchise relationship.
For an existing business owner, allowing another party to use your brand name is a risk, for you have put in so much effort to build it and probably have a very high goodwill value, and that other party might just spoil all you hard work in a blink of an eye. And share trade secrets? That sounds crazy right? It’s already called a secret and why do you want to allow other people to have access to it? What if the other party reveal it to other people or even sell it?
For potential business owner, why do you want to take instructions and follow the system of another party? What if the system doesn’t work for you and you have limitation to change it? Some new business owners also question the high total investment in a franchise when they can start a similar business at a much lesser cost. And why should you share the profit of your business with the franchisor and in most cases, the franchisor will take the royalty of your gross sales regardless whether you make a profit or not.
The above are obviously some of the many questions and concerns both existing and potential business owners have in mind with regards to franchise. And this is also the very reason why a document called Franchise Agreement exists. This document basically layout the rights and obligations of both the franchisors and franchisees in the franchise relationship. But we are not going to talk about the Franchise Agreement here. We will be discussing on why franchise is an option and probably a good option for established business owners and potential business owners in moving forward.
As a Franchisor
We’ll start off with the existing business owners in which we shall call here franchisor, assuming they buy the idea and want to go into franchising :). Ask any franchise consultant and they are the best people to tell you why you should go into franchising. Some even tell you that all businesses should go into franchising. If they say so, please don’t trust them 100%! What I will be talking here is the benefits as a franchisor when you franchise your business and it does not mean that you should because at the end of the day, it depends very much on your business model and your overall company’s direction. You will have to evaluate pros and cons yourself.
The first and probably the most significant benefit for a franchisor is savings on the resources. Franchisor does not need to look for additional resources in opening every new outlet. Capital for opening new outlets will be provided by the franchisees and the same thing goes to other resources such as manpower. Franchisor can save on interest (financial cost) of loan from financial institutions or save from diluting its share in the business in getting new shareholders.
This will also allow faster growth of the business and the brand. Instead of waiting for the profit from one outlet to be channelled to open another outlet as capital, capitals are now provided by franchisees to open each outlet. Franchise fees paid by franchisees can also be used for other investments such as research and development (R&D) and marketing in which the franchisor can put more focus on. This can further enhance the product or services offered to capture more market.
Franchisor will also get more committed workforce comparatively to employed personnel in the outlets as the franchisees had invested their monies into the business and would not want to see their investment go down the drain. Monitoring of the operations of each outlet will be closer than ever before. Owners of the outlets will have more time to check on the outlets compared to franchisors doing it themselves. And of course, unlike employed personnel, franchisee cannot quit their job freely.
As a Franchisee
For franchisee, taking up an established brand franchise will definitely help the business in terms of recognition and “visibility”. Imaging you start a fast food outlet by the name of XYZ Quick Food Sdn Bhd. Nobody will know who you are on the first day of your business. You will need time to gain the reputation and goodwill from the people around the area you operate. People from elsewhere are still clueless about your business. But if XYZ Quick Food Sdn Bhd operates a McDonald’s, immediately people from everywhere that come to your area will instantly recognise the brand and know that they can expect efficient service with certain level of standard.
A franchise will also help you jumpstart your business. If you are operating your business independently and going into the business for the first time, you will probably have to go through some trial and error to get your business running smoothly. That is if your capital is enough to sustain those trials and errors to keep you going. By using the proven system and business model, you can concentrate on what is the most important thing especially for new start-ups – sales. You can focus on how to “fly” rather than just learning to “walk”.
During the course of business, anyone will encounter problems here and there. Under the roof of a franchisor, franchisees are not alone. Franchisor and even fellow franchisees can provide marketing, management, technical advice or assistance. And if you are lucky, some franchisors might even provide financial assistance. These supports are not available when you are operating alone. At the end of the day, franchise business offers potential business owners a better chance of success with much of the risk reduced.
Franchisor and Franchisee
Many people do not actually highlight the points below as mutual benefit for both franchisor and franchisee.
When coming into the franchise relationship, franchisor and franchisee actually benefit from the increased purchasing power. The total quantity of materials ordered will be greater and this allows for better bargaining power with the supplier. Cost can be reduced and because of the significance in quantity, the suppliers will normally put special attention to franchise group.
And of course, when it comes to cracking heads, more heads are always better than one. When people with common commitment and goals come together for brainstorming, great ideas can be achieved. Franchisor and franchisees can give different views from different perspectives thus providing a more thorough decision. If you are operating your own independent business, how many people will be willing to give you free good advice?
And that’s the power of franchise! I would like the end this with the quote from the book of Patricia Sowell Harris, McDonald’s Global Chief Diversity Officer, ‘None of Us is as Good as All of Us’.
If you buy the idea of going into franchising or taking up a franchise business, the next important step is to know how to do a good selection. In the next issue, I will be talking about franchisor selection for the franchisee and in the following one after that, will be on franchisee selection by franchisor.
This article was first published in Business for Sale Magazine Issue No. 23 Nov/Dec 2011