The Beginner's Guide To Business Franchising

Business franchising is a method used by a franchiser to license a franchisee to trade under their business name, sell their products and leverage their brand. Business franchising has lots of advantages for the franchiser and the franchisee. In this article we explore these advantages, and look at how business franchising works.

Why Would A Franchiser Want To Sell A Franchise?

A franchiser would want to sell a franchise for many reasons. First of all, they earn money from initially selling the franchise, and they also make money on an on-going basis in the form of a management fee paid by the franchisee.

If the franchiser wanted to grow the business on their own, and cut out the franchisee, they would have to put more capital on the table. They would also be risking that capital, and they would most likely have to pay for it in the form of equity dilution or interest. Another strong benefit for the franchisee is that their business model is less risky on an on-going basis. They will earn their money from franchisees as a percentage of revenue. That means that even if the business does not make money, they will still earn their management fee. It is also not possible to run at a trading loss from a franchise. Furthermore, cannibalisation is only an issue if it puts off franchisees. As you earn money as a percentage of revenue, cannibalisation will not have an impact on aggregate franchisee revenue; it will only affect the profitability of franchisees.

The best way to think about business franchising from the franchisers perspective is to consider the opportunity cost of going down this route. What are they giving up on? In the long run they will earn a lesser chunk of the revenue generated; the earnings of the franchisee. They might also risk franchisees playing havoc with their brand.

Why Would A Franchisee Want To Buy A Franchise?

A franchisee would want to buy a franchise for many reasons. They will be able to leverage the business of a proven brand, and therefore they should see results much quicker than if they decided to go-it alone. They will also be able to get started in business with nothing more than passion and capital; the franchiser will usually hold their hand and help them get things on the road.

When you are a franchisee, and you own a franchise with a relatively popular franchise, it can be easy to sell the business if it is profitable and well run. You might be able to sell it back to the company, or you might sell it to someone else. When you are slogging away for your profit and wages year-after-year, it’s good to know you are building up an asset at the same time. Usually it would be rare for a small business, similar to the ones that adopt a franchising model, to be sold. Usually it would be handled in an asset-bases transaction.

Business franchising is simple, and when you’re making your initial investment, you’re buying an asset. However, you do have to consider that you may experience a better return, and more growth potential through going-it alone.