The idea of opening more locations will always cross the mind of an entrepreneur with a successful business at some point. Maybe a customer walked in and asked if there are other locations. Or better yet, the customer asked how he or she can open a similar business in another town. Once the initial excitement of this epiphany wears off, the entrepreneur is left with two options:
- Open additional locations himself or herself.
- License or franchise others the right to open additional locations.
Franchising can be a great method for expanding a brand to multiple locations, but it does place greater control in the hands of franchisees. So, why do so many entrepreneurs decide to franchise their business, rather than opening additional locations themselves?
The decision usually comes down to a shortage of certain key elements. People most commonly decide to franchise their business due to lack of time, money, or people. These constraints make it very difficult for entrepreneurs to open additional locations on their own.
Franchising has been around since at least the 1800s, but became mainstream in America only after Ray Kroc expanded a single McDonald’s restaurant in San Bernardino, California through franchising by popularizing the phrase, “In business for yourself, but not by yourself.” McDonald’s was followed by many other household names. In all of these cases, franchising allowed the owners to expand rapidly by using other people’s money, without being constrained by lack of time, funds, or personnel. Maybe Ronald McDonald and the Colonel were onto something.
Lack of Time
Regardless of the type of business you operate, opening another location takes a lot of time. First, you have to find a suitable location and negotiate a lease or purchase of the space. From there, you’ll have to obtain government permits and licenses, including building permits, business licenses, and liquor licenses if needed. Depending on the prior use of the space, you’ll then need to hire a general contractor to build out the space to your specifications, then purchase any needed furniture, fixtures, and equipment. And of course, you’ll need to find, interview, and train your employees.
It isn’t uncommon for an entrepreneur to take several months to a year to find and build out a new location. There are only so many hours in a day and so many days in a year, and therefore the number of locations you can open will always be limited by time.
Reclaiming Your Time
Under a franchise model, the franchisee is responsible for all of the above obligations. After finding a suitable franchisee, signing the Franchise Agreement, and training the franchisee on your system and standards, the franchisor’s initial obligations are usually done, while the franchisee finds a site and builds it out. The franchisor will only need to approve the site and final build out. This frees up the franchisor’s time to find other suitable franchisees and to continue operating company-owned locations.
Lack of Money
Similar to the first reason above, the money required to open a new location is passed on to the franchisee. Opening another location yourself requires you to have sufficient capital (or obtain financing) to acquire the space and built it out. On top of that, you’d also be responsible for all ongoing costs in operating that location, from salaries/wages to insurance, taxes, rent, utilities, and supply costs.
Pass on the Costs
Under a franchise model, the franchisor’s expenses are limited to hiring a franchise attorney, drafting a Franchise Disclosure Document and Franchise Agreement, registering in any applicable franchise registration states, developing an Operations Manual (often done in-house), and developing a training program for newly recruited franchisees. The cost to do all of this is almost always much less than the cost to open a new location yourself. And with the right documents in place and partners by your side, you can continue offering your products or services in multiple locations, not just one! The franchisee is responsible for all startup and ongoing costs in opening and operating their location, including leasing, construction, salaries/wages, insurance, taxes, utilities, and supply costs.
Lack of People
If you want to open another location yourself, you’ll probably need to hire a manager for that location, as well as some front-line employees. This takes time and money. Dealing with employees also presents constant challenges to any business owner, from navigating disciplinary issues to replacing employees that leave. And nothing is worse than finding and training a great manager, who then departs for greener pastures.
Overcoming a Staffing Deficit
Under a franchise model, the franchisor usually sells the franchise to an owner-operator. The owner-operator acts as the manager of the location, supervising the day-to-day activities and hiring, training, and disciplining the employees working at that location. However, unlike a manager that the franchisor may hire for one of its locations, the owner-operator is also an owner in that business location. These owner-operators have a financial stake (their ownership) in the business location and are usually much more motivated to make that one extra sale or to stay open that one extra hour. This may translate to better financial performance at the franchisee’s location, which means more royalties for the franchisor.
Fit to Franchise
Even if you are like most entrepreneurs and would like to expand your brand but lack time, money, or people to do so, franchising may not always be the best option for your business. The most accomplished franchisors usually have one or more locations that have been operating successfully for a few years, as a proof of concept.
Once you embark on franchising, you will still need to allocate time and resources to hiring a franchise attorney, preparing a Franchise Disclosure Document, complying with state and federal franchise laws, and both advertising your franchises for sale and offering and selling franchises. Once you find a franchisee, you then need to train that franchisee in your system standards.