Are you a business owner contemplating expansion? Perhaps you have explored the idea of adopting a franchising model. Franchised brands often dominate various retail and consumer markets, making them an attractive way to expand your business. This article outlines the top five reasons why you should franchise your business.
1. Expansion Opportunity
Business owners, such as yourself, may consider franchising, as it offers them a quicker path to grow their brand and market presence. Rather than relying solely on internal resources and capital to open new locations, franchising allows leveraging the financial and entrepreneurial resources of individual franchisees. In this model, the franchisor owns the trademark or symbol and operations manual. Franchisees operate a business under licence for a set period in a way that the franchisor substantially controls, determines, or suggests.
If you decide to franchise your business, you will essentially partner with independent operators (franchisees). Franchisees invest in and manage their branches or outlets using your established business model, brand, and support systems. Franchising relationships are regulated by the Franchising Code of Conduct.
While opening a new corporate store can be difficult, this system allows you to scale your business without opening each store yourself. In doing so, you can maintain your image or the quality of service unique to the brand. Such a process is particularly appealing if you want to grow your brand beyond your immediate geographical area quickly.
Opening a second or third store close to your original location can also be a great way to grow a business. However, it generally becomes difficult to continue scaling through a corporate rollout. This is in part due to the problems regarding access to capital and the risks of a corporate rollout.
2. Capital Infusion
Opening an additional store requires most businesses to have access to substantial capital. Significant funds must be tied up before that investment pays off to facilitate further growth. If you were to open another location yourself, you would likely need to complete capital-intensive tasks
It can be difficult for business owners to access the necessary amount of capital to open an additional store, let alone several. Furthermore, the time it takes and the hurdles you have to jump to secure financing for additional sites can significantly limit the pace at which you scale the brand.
Franchising your business helps you grow without the need for such capital. Instead of taking on these costs yourself, franchisees will invest their own capital to open outlets, alleviating the need for you to finance each new location independently. This infusion of funds accelerates the pace of expansion without burdening the core business financially. All of these costs are disclosed prior to entering into any franchise agreement with you.
The trade-off? As the franchisor, you will be entitled to a smaller percentage of profits, whereas, with a corporate rollout, you would be keeping all profits. However, many franchisors see this as a worthwhile tradeoff as it allows for faster scaling of their brand. Expanding your brand by franchising can also allow you to reinvest any of the fees you receive from any franchisees. You may choose to reinvest in your business, head office systems or processes to facilitate further growth.
Continue reading this article below the form3. Risk Mitigation
When expanding through franchising, sharing risks with franchisees can lessen the significant risks that are typically associated with expanding your business. This can reduce the strain on you as a business owner. Additionally, the risk exposure can also be diminished compared to your business attempting to fund new locations solely.
Other notable obstacles an expanding business faces include:
- site selection;
- staff management; and
- payroll tax.
Site Selection
Selecting sites can be difficult. It can become more challenging as you expand and move away from your initial business footprint. The reality of retail is that only some locations will meet your expectations. It is crucial to note that there are many reasons why a site may not work, including:
- the proximity of your competitors;
- changing demographics in the local area; and
- council developments.
Franchisees bring local knowledge to the table. This may better place them to select an appropriate site and commit to a lease in that location. Franchisees will also often understand the target market and its preferences best. Thereby, you should ensure there is alignment between your brand and the community it serves.
Franchise agreements often provide guidelines or criteria for site selection. These aim to maintain brand consistency and maximise market potential. While both you and your franchisee should carefully review the suitability of the site, it is ultimately the franchisee who is responsible for the success of the location.
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Staff Management
Dealing with staff management tasks, including rostering, payroll, entitlements, bookkeeping and disciplinary issues, is challenging on its own.
It can be challenging to deal with staff management tasks, including:
- rostering;
- payroll;
- entitlements;
- bookkeeping; and
- disciplinary issues.
This complexity can be further compounded when expanding and growing your business.
However, if you decide to franchise your business, your franchisees are responsible for managing staff in their store. Franchising allows you to focus on the staff management system as a whole without getting weighed down by day-to-day considerations. As a franchisor, you should consider comprehensive training and ongoing support to ensure that your franchisees can effectively train and manage their staff. Your franchisees must meet their employer obligations to avoid penalties from the Fair Work Ombudsman.
Payroll Tax
Another obstacle to a corporate expansion in retail is the likelihood of quickly reaching the payroll tax threshold. Payroll tax is a tax on a business’ wages applied when total wages exceed the threshold. This can be a substantial expense for businesses trying to expand. Most retail businesses will reach the threshold between three to five stores, and some even earlier.
Considering this tax, many businesses elect to franchise before reaching the threshold. As franchisees are responsible for paying employees’ wages, those wages do not count towards that of the franchisor. Therefore, if you franchise your business, you could avoid the expense of payroll tax.
4. Increasing Market Power
Franchising helps business owners increase their market power by using the strengths of multiple franchises. This allows you to grow the business’ significance within the industry. Through a network of interconnected and independently operated franchises, your brand can significantly amplify its market presence and competitive edge. Increasing market power is desirable for multiple reasons, including:
- the ability to negotiate better supply, distribution or delivery agreements with suppliers;
- establishing commercial relationships with large retail complex owners, such as Westfield and Stockland. Large brands will often be invited to enter new developments and offered featured lots in centres; and
- the ability to set market trends and competitive pricing (market leading).
All of the above can lead to an increase in profits, not only for you, as the franchisor, but the franchise network generally.
5. Resale Value
When your franchise your business, it may grow and see success levels that result in you being able to sell it for a profit down the track. Some owners franchise their businesses with the end goal of maximising their eventual return when they decide to sell. You can achieve this by investing time, effort and capital when establishing and growing a franchise network. The value of your business can increase significantly if the franchise expansion is successful, often becoming a multiple of its pre-franchise value.
You may also be able to sell the rights to a third party to establish and operate the brand overseas. A licence agreement permits you to do so by permitting a buyer to introduce the brand in an overseas market. Furthermore, it is another way to recognise the value of the brand you have built by upscaling your business through franchising internationally.
Key Takeaways
Franchising your business can be an excellent way to expand because it can:
- allow you to grow your brand;
- lessen your capital outlay;
- limit risks in comparison to an internal corporate rollout; and
- increase market power and potentially the resale value of your business.
If you have any questions about franchising your business, our experienced franchising lawyers can assist. As part of our LegalVision membership, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today at 1300 544 755 or visit our membership page.
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