So why do companies franchise? And is franchising for mainly cash-strapped, but ambitious small businesses?
20 years ago this question was something I dived into for my Masters of Commerce thesis. 10 NZ-founded franchise systems varying in sector and size provided their motivations – many of whom have now grown into large national enterprises. It is always a topic that deeply interests me.
People often have lots of questions, preconceived ideas and misconceptions. And no, franchising is not just for small to medium sized businesses. In the last two years, by example, we have also worked with a large government entity, and, companies listed in Australia, the United Kingdom and Japan.
There are a multitude of reasons companies’ franchise and it is always very interesting. Every company is different. And sure there are similarities, but at the end of the day franchising provides a number of potential commercial levers whose advantage will differ depending on factors relating to the individual business model, and, the motivations / strategy of the business’ ownership.
In a recent piece of work for a large and really well-known business we identified 16 separate levers.
Notwithstanding, the overriding reason tends to be growing a bigger and more valuable network. Sometimes, a competing or complementing imperative is more efficiency or cost-related.
There are three main advantages franchising brings: money, people and time. Beside each, we provide some actual franchisor words.
- Money or Access to Capital. Franchisees bring it to open sites or purchase existing ones. That means the franchisor doesn’t have to – which is clearly an advantage if they don’t have the resources as fast as they’d like to open new sites.
“Because you eventually reach the limit of your own capital… it [franchising] allows you to expand at a much greater rate than if you are relying on your own capital” - People or Motivation. Because the franchisees invest they are motivated to make a success of their operation – and will often, because of the downside risk they have, be more productive than their employee-manager counterparts.
“[You get] totally motivated people running the stores, with a vested interest in making sure their own business works” - Speed or Time. The options are typically company store development or franchising, so the addition of franchising can dramatically speed up growth which, in turn, can provide economies of scale and sometimes first mover advantages and defensible market positions.
“We didn’t start off intending to be franchised, but it developed that way because we came to realise that to be successful, you have to get to a critical mass, and to do that we had to have stores nationally. Important from both a purchasing and marketing point of view. It allows you to go on national TV, and to be able to do that cost effectively is a huge advantage.”
My research from 20 years ago still resonates with what we find prospective and established franchisors are looking for in our consulting practice.
My research from 20 years ago also analysed the problems and challenges franchise companies faced overtime and the reasons for them. Again, these insights still resonate with our franchise consulting practice and our Do it once. Do it right byline.
Do it once. Do it right means, investigating franchising your business properly, establishing the right franchising structure, recruiting the right franchisees, and providing great support and leadership. That way you have the foundations for a successful franchise system, and the basis for realising the potential of franchising.
If you’re interested in more information on why companies franchise, what’s involved, and what to expect, we are providing a free 3 hour education programme on Franchising and Licensing a Business in May in association with Westpac Bank and MYOB.