Franchising is an affordable way to expand a business without surrendering intellectual property. It is possible to create a dozen or more new units under the same brand and system in a single year if the licensor is unable to open more than one new unit per year and does not wish to offer a third-party investor such as a partner or private equity firm an ownership stake. While not responsible for wages, rents, or construction loans, the franchisor can earn a royalty from each new firm and spend on expansion and R&D to maintain its concept ahead of the competition. Franchisees can utilize trademarks and other intellectual property during their franchise term, including renewals, but the franchisor owns them at the end of the agreement. Under a standard franchise agreement, the franchisor owns any innovations the franchisee makes while running the business.
Questions to Determine if Business is Ready for Franchising
Am I prepared and ready to replicate my business?
While it is not required to have more than one business unit before franchising, most entrepreneurs learn a great deal about their business concept by establishing at least a second unit, if not more. Multiple units enable the proprietor to test size, location, demographics, managerial styles, training systems, operations manuals, product or service offerings, etc. The risk associated with franchising a single unit is failing to identify its most crucial success factors.
Am I ready for franchising as a full-time job?
Many start-up franchisors believe franchising can be a side job. After delivering basic training and handing over an operations manual, the work is done, and all that’s left is to collect royalties. The typical franchisee buys a franchise expecting a “business in a box” and that the franchisor would have solutions to all business difficulties and continue to innovate to ensure the system remains as prominent as the day the franchisee first invested. A strong franchise system requires full-time sales, training, operational support, marketing, R&D, and quality assessment. A start-founder up’s may play all these responsibilities, but they must hand up their original unit to other managers so they can focus on growing the franchise system.
Am I ready to keep innovating advantages unique to my business?
Franchisees want a high income and a long-term investment for themselves and their families. They expect their franchisor to promote trademarks and design exciting offerings to attract and maintain customers. A business owner whose pizza restaurant is the only one in a suburb may not be able to help a franchisee repeat his success. No franchisor promises success, but a successful one will focus on what sets it apart from the competition in all markets where it operates or franchises. Without marketing and innovation, it may be surpassed by the next trend or a well-funded competitor, causing franchisees to leave and prevent others from joining. A great franchisor keeps its brand current and listens to franchisees.
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