When a business has strong sales in a local market and aspires to establish a regional or national presence, franchising is one growth strategy companies consider. After all, the logic often goes, with investments from franchisees, the business brand and operations can quickly extend beyond its current base before the competition has a chance to get a foothold. That expansion can yield economies of scale unavailable to single-location ventures, not to mention potentially boosting brand awareness.
What many small business owners fail to realize up front, however, is that franchising a concept essentially requires that an entirely new business unit be created to manage franchise operations. No longer is the business selling pizza or commercial printing or home painting services. Once a franchisor, the company sells others on the business concept.
Can your business afford to be distracted from its original purpose? If money is tight right now, setting up a new franchise operation is unlikely to turn the tide in the short-term.
When individuals or businesses pay to become a franchisee, they pay a flat fee up front to become part of the company. In return, they receive proprietary information about setting up and running the business, such as assistance in choosing an optimal location, as well as access to the internal infrastructure, such as a manufacturing or order processing system, for example. In exchange for that investment, the new franchisee also has the right to use the company’s brand name and associated logos and marketing materials.
As the franchisor, you are responsible for providing all the guidance necessary for your franchisees, who have now invested in your concept, to be successful. The more successful they are, the more money you earn, since a second payment franchisees typically are required to make is a recurring commission based on monthly or quarterly sales.
A third payment some franchisors charge is an advertising fee, which is an investment that is used to market the brand in all of its markets. All franchisees pay into the advertising fund, which then supports increased awareness of the brand.
Keep in mind that franchising is a complicated process that is heavily regulated by the Federal Trade Commission. Setting up a franchise will require significant time and resources.
Is now the right time?
It may be if you have customers lining up at your door clamoring for your services, or who are reaching out online through your website asking when you’ll be setting up shop in their town. Demonstrating the business can be successful in one location is rarely enough to prove the concept will work nationwide, but if you have demand from other regions, that’s a good sign.
Another good sign is when potential franchisees begin reaching out, asking if you are accepting franchise applications, or if you’ll be franchising in the future. Having potential franchisees already in the pipeline can help justify the outlay of cash required to set up a franchise operation.
If your company is profitable, seeing consistent sales increases and rising demand, you may be on to something. But franchising isn’t the only strategy for geographic expansion.
An alternative to franchising
Depending on your type of business, you may want to consider an alternative to franchising — licensing. Common in software and product markets, licensing is generally less expensive to set up and manage, but can still generate new revenue streams.
If you’ve ever watched the TV show “Shark Tank,” you’ve undoubtedly heard the investors discuss the merits of licensing as a tool for quickly expanding a technology or product into new markets. Many of the restrictions that exist in franchising regarding territories may not apply with licensing, allowing companies to essentially sell the right to use their product in a wide range of applications and geographic markets.
Licensing deals involve a company selling the right to use its brand, product or intellectual property under certain conditions. The license is non-exclusive, so the licensor can sell it multiple times, and the licensor does not get involved in managing the licensees’ companies.
As with franchising, an upfront license payment may be paid, as well as a recurring usage fee. But there is typically no need for ongoing consulting, support or training, as franchisors are expected to provide.
While franchising is a more familiar concept to most business owners, licensing can often be a better strategy.