Congratulations. Your hard work has paid off and your business has finally started to turn a profit. What’s next? Consider this. Some business owners are perfectly content to achieve profitability, with no desire for anything bigger. But others may look to build on this success and grow their business, using the original store or restaurant as a model for a chain of establishments.
If that’s the case, the owner is faced with a strategic decision. Do you expand through franchising (such as 7-Eleven or Subway) or directly own your additional shops (like Starbucks)?
With direct ownership, a corporate chain owns all the stores or units, which provide customers with an almost identical experience and product from one store to the next. As a direct owner, you and your team are responsible for running the day-to-day operations of each unit. It’s more work and requires expanding your workforce and management team, but it also gives you more control of policies and procedures. The biggest plus might be profits: As the business owner, you keep all the returns from each of your stores.
With a franchise operation, the stores are owned by a third-party investor, who operates the daily affairs of each unit. As the franchisor, you would provide the store owner with a set of guidelines, products, pricing and operating procedures, as well as a proven business plan, marketing muscle and recognizable brand name. The cost of starting and the time devoted to managing the store would fall on the franchisee, while you as the corporate owner would typically receive a one-time franchise fee at start-up, and a weekly or monthly royalty payment – a percentage (usually around 4%-6%) of the gross sales revenue.
Often, it’s not an either/or proposition.
“A vast majority of franchisors do both,” says Mark Siebert, CEO of iFranchise Group, a franchise consulting company in Homewood, Ill. Siebert emphasizes it’s often not a question of one or the other but direct ownership and franchising. For example, all Starbucks coffee shops in the U.S. are directly owned and operated by the company, but their cafes can be franchised in Europe.
Still, the first issue for a company is: Exactly when is your business ready for the next step? “When you’re ready to franchise is when you are at a position where you feel comfortable that you can make a franchisee successful,” says Siebert.
Robert Stidham, president of Franchise Dynamics, a franchise sales outsourcing firm in Chicago, echoes Siebert. He offers two criteria. “Your business model has to be proven, with sound economics,” he says. “Second, you know that the business and its product are salable,” beyond your original store.
If an owner chooses to franchise, the main advantages, according to Siebert, are time, people and money. “From a capital standpoint, the franchisee pays for all the investment when opening a new venture,” he says, which basically allows you to grow your business with other people’s money.
For example, a franchisee of a 7-Eleven or Subway puts up his or her own money for the new store while working from very specific designs and business models; the new shop looks nearly identical to all the others. From a people standpoint, franchisees are typically highly motivated. “They’ll do whatever it takes to make the franchise successful,” he says, “and will make it a long-term commitment.”
The “time” advantage Siebert speaks of is the speed with which a business can grow when it leverages the time and energy of others. “The franchisee is going to select the site, hire the architect and supervise the buildout,” among other things, says Siebert. As a result, the company owner doesn’t need a big design department and other major additions to its corporate team. “Leveraging the resources of the franchisee does a lot of that work for you,” he says.
For direct ownership, a big advantage is control. The employees of a new shop, from management on down, are your employees; as the owner you have the power to hire and fire. With a franchise, you may be powerless to do anything about bad employees at franchised shops, which can have a negative impact on your business and brand.
While direct ownership requires the owner to put up all the capital, there are still substantial investments required in franchising. “You’re investing a lot up-front in the franchise relationship,” says Stidham. “The fees are not going to cover all the costs to get them to a place where they’re profitable.” Which means time and money have to be invested in training, technology, compliance and other systems.
Whether you choose franchising or direct ownership, you need a team to handle the added responsibilities. Adding new units requires managers, and corporate staff in areas from operations to marketing. With franchising, “you have to have people around to help the franchisee,” says Stidham, which includes legal support, managing the supply chain, and training support.
The good news for franchisors, according to Stidham, is most franchises outperform company-owned divisions. It’s probably why franchising has grown in popularity. “Twenty-five years ago, there were 300 franchise concepts. Today there are thousands,” he adds.