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Franchising

On December 14th, 2019, Posted by admin

Introduction

Business development model plays an important role in expansion programs and as such an organization has to make critical decision on the model it intends to adopt in its expansion. Each model adopted has major benefits and pitfalls that business managers must be willing to accept. This paper considers a situation of a small business with ambitions to expand and looks at the potential for franchising or opening a new branch in different locations.

Discussion

Franchising is a business model that involves granting third party businesses or individuals a licence to operate using the business brand and model for a specific period after which the licence is renewed or offered to another business. Franchising has a lot of emphasis on intellectual property rights and only allows third parties to use existing business concept in full or partially. Franchising is a very complex undertaking for both the buyer and the seller and hence requires critical research and inquiries before an agreement are reached. Franchising has a number of potential benefits for the business as discussed below:

Capital Efficiency

Franchising is a perfect tool that small business can use to expand without necessarily requiring large sums of capital. The idea of franchising transfers the burden of fund raising to the buyer who will have to manage all the business costs including set up. Franchising can therefore inspire rapid expansion of the business since the buyers or investors will always have readily available capital to expand the business.

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Brand Equity

A small business that franchises its brand always receive franchise fees in exchange for the operating rights and as such the business can still build on the brand without spending too much money. They also receive royalties that provide regular revenues to the business without selling any product. The royalties can be used to enhance the business brand at corporate level including training and development, marketing and advertising, improve quality of offering through research (Goldberg, 2015).

Reduction of fixed costs

Franchising allows the franchisee to work on a well-established brand for profitability. Although the ultimate owner of the right to operate is the Franchisee, they don’t have the fixed cost required for day to day running of the business and hence this business model will potential save the business a lot of costs (Hoy and Stanworth,2014).

Case for Rapid Expansion

Franchising provides an opportunity for rapid expansion of the business including in places they could not manage. Franchising allows the business to work with an elaborate network that will source for strategic business locations.

Challenges With Franchising

Despite the numerous benefits associated with franchising, there are a number of challenges that may affect the business model. They are discussed below:

Lack of Control in the business

Franchising allows third parties to directly offer the products and services to the customers and as such it would be difficult for the business to exhibit direct control over the activities of the franchisor. Furthermore, the employees working for the franchisor are not under direct control of the franchisee and hence it’s so hard to deal with client issues relating to the quality of service offered by the third parties. The franchisee therefore need place too much trust on the employees of the franchisor and hope that the level of service offered is up to the standards required by business. This could also put the business reputation on the line. Franchising is therefore considered to be a very tricky business arrangement where it’s very difficult to take control of issues around customer service and quality of offerings (Mcintosh,2015).

The business arrangement also requires a natural fit between the franchisor and franchisee where both parties must have a mutual agreement and strong believe that the business will lead to benefits for each party. The Franchisee comes with a strong brand that customers recognise within the market and therefore expect to earn royalties and the franchising fees. The Franchisor on the other hand strongly believes that they can invest their capital and other resources in the brand to offer goods and services for profitability. The absence of this mutual agreement will render the arrangement impractical (Mcintosh, 2015).

Opening additional Locations

Expansion through establishment of business in different locations would be another option that a small business could explore. This model is particularly relevant to small and medium sized businesses with interest to expand locally or internationally. The potential benefits from this option would include:

Control of the business

Establishing subsidiaries in different locations provide the ultimate control that a business would want and hence the management will have their way on matters to do with strategy, customer service and the business offerings. Such a model also allows the business to quickly identify mistakes and take corrective measures (Atlantic Publishing Group,2006).

On the other hand opening a subsidiary is a costly undertaking that would require additional capital that the business may not be in a position to raise. The business may not have full knowledge of the dynamics in the new market and hence the probability of failure is very high (Libava,2011).

Recommendations

After looking at the two business models available to the business including the key benefits. The recommendation is to franchise the business brand due to the following reasons.

Franchising will allow the business to focus on building the brand rather than concentrating on operational processes of the business. In this regard, the business will build a strong brand that could eventually fetch the company additional revenue in royalties and franchise fees. Moreover, this will be the quickest way to expand the business at a low cost.

The Franchisors will often have first hand knowledge of the market and the business dynamics and hence the business will be saved from additional research to try and understand the market.

The franchisor assumes all the operational risks of the business and hence this will relieve the franchisee the burden that could include sourcing for finances for continuous operations.

Lastly, franchising is so flexible on the part of the franchisee as it is possible to grant an operating license to numerous franchisors. The business can therefore rapidly expand.

References

Atlantic Publishing Group,(2006). The Franchise Investor’s HandbookA

Complete Guide to All Aspects of Buying, Selling Or Investing in a Franchise.

Atlantic Publishing Company.

Hoy,F. and Stanworth,J.(2014). FranchisingAn International Perspective.Routledge.

Goldberg,E.(2015).”The Benefits of the Franchise

Model”.franchising.com.Available at:

http://www.franchising.com/howtofranchiseguide/benefits_of_the_franchise_model.html  . Accessed 25 November 2015

Mcintosh,I.(2015).”Smarta”smarta.com. Available at: http://www.smarta.com/advice/starting-up/franchising/the-pros-and-cons-of-a-franchise-business-model/. Accessed 25 November 2015

Libava,J.(2011). Become a Franchise Owner!The Start-Up Guide to

Lowering Risk, Making Money, and Owning What you Do.John Wiley & Sons.

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