Companies seeking to expand may face the dilemma of whether to build their own units or turn to franchising. With the latter process, the company sells the rights to operate individual units to entrepreneurs in exchange for a percentage of the unit’s sales. Franchising and building company-owned units each offer certain advantages and disadvantages.
If the goal is to grow a chain as rapidly as possible, franchising is likely the better choice. Because the franchisee is supplying the capital necessary to open new units, the company doesn’t have to come up with the funds on its own. As long as the company can locate suitable franchisees who can secure financing, it is conceivable it could expand the operation into several different geographic areas at one time instead of implementing a one-unit-at-a-time approach.
Franchising also provides the advantage of having motivated owners who are eager to make a profit. Because the unit owners are investing their own money, they also face the risk of losing their investment if they do not operate efficiently. On the other hand, company-owned units are typically managed by employees who are not investing their own money. If the managers are not adequately rewarded for the unit’s performance, their motivation may not be as strong.
If the goal is to maintain as much control as possible over the operation of the units, retaining company ownership is the better choice. Although franchisees are typically required to follow the franchisor’s operating procedures, the units are owned by entrepreneurs and not the company. The franchisee is ultimately responsible for profits and losses, so he may decide to implement changes on his own without notifying the franchisor. It is possible the changes could have a negative effect on the company’s brand.
Keeping All Profits
When operating company-owned stores, the profits stay with the company and do not have to be shared with outside owners. With franchising, the unit owners keep the profits they generate, and are only required to pay the initial franchise fee as well as a relatively small percentage of unit sales in the form of royalties to the franchisor. If the company is not able to find enough qualified franchisees, it may have difficulty benefiting from the franchise process.
By : Chris Joseph, Demand Media http://smallbusiness.chron.com