In Episode 3 about why businesses franchise of The New Zealand Franchising Podcast, Dr Callum Floyd draws on more than 30 years of franchising research and consulting experience. He explores the different organisational starting points and motivations that can lead a business towards franchising.

Why would a successful business choose to franchise rather than continue opening and operating company-owned locations? The familiar answer is often that franchising provides access to capital and enables faster growth. While those factors can be important, the decision is usually more complex.

Businesses may approach franchising from a single successful operating unit, a substantial company-owned chain, or an existing network of licensees, dealers, agents, distributors, contractors or joint-venture partners.

Some are pulled towards franchising by opportunity. Others are pushed towards it by limitations in their existing structure. Frequently, both forces are present.

Learn why businesses consider franchising

Franchising is often described simply as a method of business expansion. However, it is more accurately understood as a choice about organisational structure.

That choice affects:

1. who invests
2. who owns the local business
3. who manages its operations
4. who carries particular risks
5. how responsibilities are divided
6. how value and returns are shared

For some organisations, the objective is expansion. For others, franchising may be considered as a way of optimising or restructuring an established network, improving local ownership and accountability, or creating a more sustainable operating model.

Different pathways into franchising

Businesses can arrive at franchising from very different starting points.

At one end may be a founder operating a single proven business and considering how the concept could be replicated.
At the other may be a company-owned chain with dozens or even hundreds of locations, considering whether some or all of those operations should be owned and managed differently.

Other organisations may already operate through licensing, dealership, agency, distribution, contractor, cooperative or joint-venture structures. In these situations, franchising may be considered as a way of formalising, converting, strengthening or restructuring an existing network.

This variety means there is no universal pathway into franchising and no single reason that applies equally to every business.

Six interconnected drivers

In the episode, Callum brings the principal motivations together into six interconnected drivers.

1. Capital and asset deployment: Under a company-owned model, the company generally funds each new operating unit, including premises, equipment, vehicles, fit-out and working capital. In a franchise structure, the franchisee will typically fund and own much of the local operating investment. This does not mean franchising eliminates the franchisor’s need for capital. The franchisor must still invest in the business model, franchise structure, support systems, leadership, training, technology and ongoing network development. Franchising changes where capital is invested and how assets are owned and utilised.

2. Ownership and motivation: For many organisations, the motivational effect of local business ownership is one of the most important reasons for franchising. Franchisees generally invest their own capital and have a direct financial interest in the performance and long-term value of their businesses. Ownership can therefore create different levels of accountability, persistence, local effort and attention to operational detail. It may also provide an ownership pathway for capable employees or managers who wish to build a business of their own while remaining part of the wider network.

3. Management capacity: Managing a growing company-owned network can become increasingly demanding. Each additional location requires local management, supervision, performance systems and central oversight. Franchising can distribute much of the local management responsibility to franchisees. A capable franchisee may lead employees, manage customers, conduct local marketing, solve operating problems and take responsibility for local business performance. However, franchising does not remove the need for management. It changes the nature of management. The franchisor must become skilled at selecting, training, supporting, influencing and holding independent business owners accountable.

4. Local knowledge and continuity: Locally invested franchisees can bring detailed knowledge of their customers, labour market, competitors, property market and community. They may also provide greater continuity than employed managers who may be transferred, promoted or leave the organisation. The design challenge is to determine which aspects of the business must remain consistent across the network and where local judgement should be encouraged.

5. Scale and network value: A well-structured franchise network can create benefits through scale.
These may include:
1. stronger purchasing power
2. increased brand visibility
3. broader marketing reach
4. shared investment in technology and training
5. specialist support capability
6. improved access to suppliers, knowledge and data.

Scale does not create value automatically. The network must be structured and managed so that growth strengthens the economics and capabilities of both the franchisor and its franchisees.

6. Risk, return and interdependence: Franchising reallocates risk and return between the franchisor and franchisee. The franchisee generally carries much of the local investment and operating risk, while gaining the opportunity to generate income, equity and capital value from the local business. The franchisor may invest less capital in each operating unit but remains responsible for the stewardship of the brand, system, network and long-term competitive position. This means franchising is highly interdependent. The parties may carry different risks and responsibilities, but their long-term outcomes remain closely connected.

Franchising is not automatically the answer

A successful business is not necessarily a suitable franchise.

Franchising can magnify weaknesses in an underlying business model. If the concept is unprofitable, poorly differentiated, overly dependent on the founder or difficult to teach, franchising will not solve those problems.

It may instead spread them across a wider network while involving the livelihoods and capital of franchisees.

The important questions are therefore not simply:

Can this business be franchised?

They are:

1. Should this business be franchised?
2. For what reasons?
3. And through what type of franchise structure?

From motivation to franchise architecture

Understanding why a business is considering franchising is only the beginning.

That motivation must then be translated into a workable franchise model covering areas such as:

1. the roles of franchisor and franchisee
2. operating responsibilities
3. territories
4. fees and investment
5. training and support
6. marketing
7. technology
8. supply arrangements
9. governance
10. performance management
11. commercial returns for both parties

Callum describes this broader process as franchise architecture, the design of the integrated organisational and commercial structure that supports the franchise relationship.

Key takeaway about why businesses franchise

Franchising does not remove the need for capital, management, responsibility or risk. It reallocates them across the franchisor, franchisees and the wider network.

The right structure will depend on the organisation’s existing position, strategic objectives, economics and reasons for considering franchising.

Considering franchising your business?

Franchize Consultants works with businesses at many different starting points—from a single successful operation through to large company-owned, licensing, dealer, agency and contractor networks. Our work can include franchise feasibility assessment, financial modelling, franchise architecture, franchise development, documentation, manuals, training and implementation support.

Contact Franchize Consultants if you are interested in meeting about franchising your business. Or if you would like help with an established franchise network. We’d be very happy to sit down with you to understand your situation and objectives and explain the supporting services we provide. You can also follow us via LinkedIn, Facebook, Instagram and Google.