Advantages and Disadvantages of Franchising for the Franchisor

Is your business at a key pivot point? Do you have the ambition to take it to the next level, but you’re being held back by finances or the lack of expertise within your company to open new branches and locations?

It sounds like you should consider the business evolution that many of today’s biggest companies have used to grow rapidly, and switch up to a franchising business model.

To help you make the right decision for your business and decide if you should franchise your business, we’ve put together this list of advantages and disadvantages of franchising for the franchisor.

What is franchising?

Franchising is a business model in which the owner shares their knowledge and operational playbook in return for a percentage of the franchisee’s profit and a commitment from the franchisee to follow their guidelines.

You license your trade name and other aspects of your business to the franchisee, who establishes a new location or outlets under the same trade name. Of course, you want the franchisee to be successful ─ their success is your success. Therefore, you should provide benefits such as training, marketing, and advertising to the franchisee. In exchange for these services, you’ll receive an initial fee from the franchisee and take a percentage of their earnings from sales.

Just how successful could you become by operating as a franchise? Here are just a few of the world’s largest franchises:

• KFC

• McDonald’s

• Hampton by Hilton

• Anytime Fitness

• Century 21 Estate

• UPS

• Snap-On Tools

• Petland

• The Maids

• Planet Fitness

• H&R Block

• Dogtopia

Without franchising, the above companies might not be the household names they are today. Certainly, it would have taken a lot longer for them to grow to the size they are now.

The benefits of becoming a franchisor

The benefits of franchising are many. The most obvious is that you can use the franchise model to grow your business without having to invest a lot of money upfront. Indeed, franchisees pay you to trade under your brand name!

Here are the top 13 benefits of franchising to the franchisor (you):

1. Potential for faster expansion

One of the benefits of franchising is that it allows your company to expand faster. As the franchisor, you can focus on developing new products and services, while your franchisees manage all day-to-day operations, adding sales and growth.

2. No direct managing responsibilities

The franchisor has no direct managing responsibilities for their franchised units. You can focus on other duties such as marketing or sales. A franchisee, on the other hand, will have to work hard to maintain their franchise by complying with your policies and regulations, as well as the day-to-day management of their business and teams.

3. Proud, talented, committed, and highly motivated franchisees

Franchisees are in business to be as successful as you are. They are committed to their own success and motivated to achieve their personal goals through their business ─ lowering costs, increasing sales, and improving profits.

4. Increased purchasing power

The larger your company, the better its buying power. You may negotiate discounts on supplies that you never imagined possible ─ and that directly impacts bottom line results.

5. Steady cash flow from royalties

The franchisor benefits from having a steady stream of money coming in with much lower risk. It’s a fantastic flow of passive income into your business.

6. Maintaining consistency and quality in the franchises

If you are worried about maintaining the consistency and quality that is the hallmark of your brand, don‘t be. Through wise and fair contract provisions, customers will enjoy the same quality of products and services across all your franchised operations.

7. Some limits of liability extend to the final consumer

Though franchisees operate under your trade name, and in accordance with your internal rules and operational processes, you will have some limits of liability to the consumer.

8. Putting little money into new locations

Franchising reduces the cost of expansion. Your company can open several franchises without having to invest too much money upfront. Your major investment is in creating and maintaining a standardized business model and brand, which can be done with comparatively little money upfront.

9. Successful locations can return high royalties

Franchisees are a business owner’s best friends. They have the potential to generate high returns for you and are highly motivated to do so ─ because they are motivated to grow their own sales and profits.

10. Improved efficiency and higher quality levels

Consistency of business operations and scale of your business deliver improved efficiency and quality.

11. Brand development

You gain access to more markets faster, developing your brand into new locations. As you do so, your franchisees will promote your brand in their territories for you, and your brand’s reputation will be shared more widely.

12. Ideas for future success

Entrepreneurs are creative. They enjoy innovating their businesses. They will share their ideas with you, and you can cherry-pick those that will fly and incorporate them into your operational processes and practices.

13. Support from others

The franchise model also helps you to have a support system and a team of people who can help you in your work. But it’s not only the support you receive from your franchisees. As your business grows, you will develop a wider and deeper network of people who can offer advice to help you with various aspects of your business. 

The drawbacks of being a franchisor

Before you get carried away with your enthusiasm for the franchise model, you should be aware of the disadvantages of franchising. There’s always a flip side of the coin! Understanding these disadvantages of franchising to the franchisor should help you create a successful and profitable franchise business.

1. Decreased net receipts

Receiving royalties may be fantastic, but you won’t make as much as you would if the store or business location were your own.

2. Franchise recruitment can be challenging

It’s more challenging to find the best people to become franchisees and help your business expand. You need the right mix of experience, knowledge, and entrepreneurial mindsets. People who create are harder to find than people who do (employees).

3. Independence of franchisees

While they are restricted in what they can do by your guidelines, practices, and processes, franchisees are not your employees. You don’t have management control over them. Therefore, it’s crucial to ensure that you are clear with your expectations of them and that these are detailed in your contracts.

4. Differences in business skills

At least in part, your business is successful because of the skills you deliver to it. This includes your management style. You’ll want to ensure that franchisees have the skills to succeed.

5. Upfront costs and investment (time and money) can be high

We’re not only talking about money. You’ll need to commit time to create a successful franchise model, too. Many successful franchise businesses start out with a pilot, just as you would develop a prototype of a new product, or a test of a new service, before shifting gears to full speed ahead.

6. Selecting a bad franchisee can damage your brand reputation

Your business strength is in its reputation. If you select one wrong franchisee, it could destroy this reputation. This is one reason franchising companies work with experienced franchise consultants, who can put forward best-fit entrepreneurs and candidates to become your franchisees.

7. The sharing of confidential information with franchisees can be risky

You’ll need to ensure that your franchisees are fully committed to your brand and business. The last thing you want is for your trade secrets to leak ─ once more, the value of watertight contracts cannot be understated.

8. Legal regulation

Legal regulation is also important for franchisors because it protects them from lawsuits and other legal issues that could arise from their franchisees. It also provides franchisees with clear expectations and an understanding of what they need to do to be successful with their business.

Is franchising the right option for you?

Franchising is a popular business model that has been around for decades. It’s a proven and successful way to grow your business by providing the infrastructure and support for other people to run their own companies under your brand.

However, as you can see, there are many advantages and disadvantages of franchising to the franchisor.

Franchising can be an excellent option if you’re looking to expand your company’s reach quickly, but if you’re looking for complete control over your company’s future, then this might not be the best option.

To gain the clarity and insight you need to make the best decision for the future of your business, book a free consultation with New Ground Consulting today to benefit from our direct franchise industry experience.

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