Most small business owners have aspirations to continue to grow their business. This growth is certainly in revenues, but also in size and market; and thankfully, these all generally go together. The way to grow is different for every type of business, but for most retail storefronts, the best way to grow is by adding locations. Unfortunately, adding locations can be very expensive, and requires you to split your time between multiple locations. So as a way to cut down on costs and risk, many business owners look to franchise their business, allowing someone else to use the name in exchange for a portion of the profits. Here is a look at the pros and cons of franchising a business.
Faster Expansion – If your goal is to expand across a large area, franchising is a great way to do this, as it allows others to use their capital to build out your brand. You could, in theory, have an unlimited number of franchises in development at once with no cost to you.
Revenue Stream – When you sell franchising rights, you are allowing someone else to use your name and taking a portion of their profits forever. This means that you get an income stream for doing nothing.
Maintain Your Equity – If you go the traditional route of expansion, you will likely need to borrow money or find a partner to build out more locations. With franchising, there are no partners, no loans, and no equity splits.
Less Risk – By franchising, you are not taking any responsibility for the new location. If there is an accident, it will not impact your insurance, rather it will impact the franchisees. If the business fails, it will not impact your bottom line, instead, it will harm the franchisee.
Limited Upside – If you franchise your name, you will only ever receive a portion of the profits from the other locations. So if the other locations become more successful than the original, you will never see the full potential. And if you franchise too aggressively, it can become difficult to expand yourself.
Lack of Control – Once you allow franchisees, they are in control of their franchises. No matter how hard you try, you will not be able to control their day-to-day operations, their quality, or their customer service. And if you get a bad franchise, it can damage your reputation and hurt your business.
Dilution of Business Value – If your goal is to one day sell your business in its entirety, franchises can make that harder. Someone who looks to buy your business will likely want control of everything, and franchises can make that extremely expensive or impossible. This can impact what someone is willing to pay for your business.
If you are considering franchising, be sure to consider both the short and long term ramifications to your business and business model. There can be some unintended consequences to franchising, however, when done properly, there can also be incredible income streams created with no risk or effort on your part.