What could be the advantages and disadvantages of franchising your business?

The decision to franchise your business could result in the following advantages:

• Faster expansion for less capital/risk - More rapid expansion of your business over a larger area using the capital of another and allowing another to take the risk. There is no need for the injection of further capital in order to achieve a rapid expansion rate. In this way more branches/territories are developed, new markets are reached and your brand becomes more widely known in less time it would take for you to raise the capital and open branches yourself in the different locations. Growth is only limited by the market and the number of people willing to purchase a franchise.
  
  

• Profit Potential - The potential to general substantial profits from initial franchise fees and ongoing royalties or service fees. The Franchisor can also earn revenue from the sale of its products or services to the franchisees and commissions etc from approved suppliers.
  
  

• Motivated Managers - Franchisees will be keen, well motivated and alert to the need to minimise costs. Because the manager of the franchise has invested capital into purchasing it and because they are in business for himself not for another. Their pride in their ownership of the business and self motivation means that your brand will be shown in the best possible light.
  
  

• New Ideas - as the number of Franchisees grows and they get to know the system well you will benefit from their ideas to improve the business.
  
  

• Valuable asset - your goodwill in the intellectual property associated with the system becomes a marketable and valuable asset. In addition once growth and profitability are established it will be easier to sell thereby providing you with an exit strategy.
  
  

• Marketing Advantages - Most franchise agreements require Franchisees to advertise and promote their business locally. All locations benefit from such marketing.
  
  

• Economies of Scale - the more locations you have the bigger your negotiating power you have in relation to supplies, sites and services.
  
  

• More time to spend on growing your business - Franchisees will perform the all consuming day to day aspects of the business freeing you up so you can grow your business by promoting and selling more franchises.
  
  

• Ability to expand to foreign countries - using Franchisees with local knowledge and experience means you are able to expand the business into areas you may not be able to by yourself.
  
  

• Less employee problems - each Franchisee is responsible for the people working in its store, not you.
  
  

Disadvantages of Franchising could include:

• Difficulties in recruiting the "right" Franchisee - a non-performing Franchisee can result in significant damage to the Franchisor's reputation - both in the eyes of the public, its existing Franchisees and potential Franchisees. This is why it is crucial to be extra careful when recruiting your first Franchisee because the system may fail to get off the ground if the first Franchisee fails.
  
  

• Difficulties in maintaining Franchisee compliance - adherence to the system if maintaining your brand's reputation. A Franchisor can experience difficulties in obtaining compliance where a Franchisee who is otherwise performing well, refuses to comply with what it thinks are relatively minor and unnecessary requirements. This is why it is important to ensure that your franchise agreement has mechanisms to deal with this situation and which don't necessarily result in termination of an otherwise performing Franchisee.
  
  

• Franchisees querying need for Franchisor - when a Franchisee becomes successful they may query why they need the Franchisor at all because they believe the reason for the success of their business is due solely to their own hard work. They forget that they could never have been a success in the first place without the benefit of being able to use the Franchisor's systems, and intellectual property and market power. This can lead to the Franchisee refusing to comply with their obligations which in turn could impact on the Franchisor's relations with both its other Franchisees and its customers.
  
  

• Franchisees becoming more powerful than the Franchisor - a very well performing franchisee can sometimes, as a result of their performance, be placed in a stronger negotiating position than the Franchisor if the situation is not well managed. This can also happen when a number of Franchisees "band" together to form an informal franchise adviser council with the objective of putting pressure on the Franchisor if the right structures for everybody are not in place. The Franchisor can, from the very beginning, take steps, including incorporating certain terms in its franchise agreement and operational steps (including the formation of the franchisor-controlled Franchise Advisory Council) to ensure that such bodies function appropriately, constructively and well.