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What is franchising and why it is important?

Feb 7, 2019

One in every seven business in the United States is a franchise business. Franchising is not just an industry in itself, it’s a way of doing business that can be applied in almost any sector. Today, approximately 3,400 established franchise brands operate in 29 sectors across more than 225 subsectors. For many small business owners franchise can turn out to be an ideal business expansion.

What is Franchising:

Franchising is a continuing relationship in which the franchisor (owner or company) provides a licensed privilege to the franchisee (a third party or person) to do business under their marks (trademark and trade name). The franchisor offers assistance in managing, marketing, merchandising, organizing and training in return for a monetary consideration. In simple terms, franchising is a method for expanding business and distributing goods and services through a licensed relationship.

There are two main forms of franchising:

  • Business format franchising: In Business format franchising, the franchisor not just provides their trade name, products, and services to the franchisee but an entire system for operating the business with a full range of services and support. The franchisee signs an agreement to conduct operations in conformity with specific rules laid out by the franchisor.
  • Traditional or product distribution franchising: Traditional franchising is larger in total sales than business format financing. The focus is not on the system of doing business but mainly on the products manufactured or services provided by the franchisor that should be followed by the franchisee. In most of the cases, the manufactured products generally require pre-sale and post-sale services for industries like automobile, trucking, gasoline, etc.

Why franchising is important for small businesses:

  1. Franchising is the best way for small business owners (franchisor) to expand more quickly and cost-effectively than opening up further business outlets. This can be done by granting franchisees the right to run their own business under your brand name and guidelines.
  2. Franchising allows franchisors to extend and grow their distribution chain in minimum time. It is a great alternative for developing a chain of stores, to provide their products and services to customers across various geo-locations.
  3. Franchisors get an opportunity to expand their networks which helps in increase of trust and goodwill.
  4. Franchising small business provides franchisors to receive feedback on their product quality, popularity, customer needs, and choices.
  5. As the small businesses are already established as a brand, the franchisee need not necessarily require to put extra efforts in promoting the product or service.

This sums up to the context that franchising is the most conventional practice of expanding your small business.

“How to actions” for franchising your small business:

  • Build your brand: As a franchisor, your most valuable asset is your brand. Your brand represents your beliefs, culture, and attitude toward your customers. Through franchising, you are giving new people (franchisee’s) the ability to represent your brand. This is one of the biggest risks in franchising. No detail is too small. Clear guidelines for the use of all your brand assets should be established. Make sure that you are sending one clear message from a single source, and that message is consistent throughout the organization. Monitor everything, pay close attention to all the assets that go up on your social platforms and make social listening a regular habit.
  • Get your business organized: Think through the process of how precisely your business works. The Franchisees will require exact details and guidelines to get their businesses up and running. From marketing to brand control to business cards to staff training, it all has to be executed in a similar manner across franchisees. Develop an operations manual of best practices and reference policies for your franchisees and also create an approval process for signing on any major decisions.
  • Hire a lawyer: Getting expert advice can help smoothen out the franchising process. If you are a starter, you will need to fill out a franchise disclosure document, that has the distinct process you need to follow and it’s important to have a lawyer walk you through this process. You will also need to set pricing, create a franchise agreement and determine intellectual property protection.
  • Be selective on your franchisees: You have to be extremely picky when it comes to selecting franchisees. It is one thing to find people with capital, but even more difficult to find the right people to represent your brand. It is essential to make in-depth research of your potential franchise owner as it is important to have the right background to run your business. This is someone (Franchisee) who will be representing your business, so make sure it’s the best fit. Set up an interview process to find the best fit.
  • Choose the right location: What locations make the most sense for your business? Where do you have brand locations already? Make sure you consider and choose your location wisely so that it doesn’t hurt sales in your initial location. Keep visiting these locations time to time in person to have a track of what is happening where.
  • Find a mentor: There are always people who are willing to give you advice, you just need to go and seek them out. Gaining knowledge through other people’s experiences and perspective will do really good for your business.
  • Know how you want to grow: Do you want to grow and expand your business at an international level or within the same country or have a statewide plan? Have a steady strategic growth plan for your business.
  • Support your franchisees: Make sure you do everything to encourage franchisees by celebrating victories and milestones. Search for articles that you find will be helpful and share them. And also set up a way for franchisees to communicate with each other.  Finally, the relationship between you and the franchisee is unique and you need to treat the franchisee as a business partner, not a person who works for you.

Benefits of franchising your small business:

The benefits of franchising your small business are faster growth with less capital expenditure. You don’t have to invest your own capital to finance your growth, which is why it is important that your business model offers franchisees a chance to prosper and also that you have a proven concept before entering the franchise sector. A franchisor who is franchising his small business needs capital to develop legal documents, training programs, marketing materials, manuals and also marketing budget for franchise lead generation. This investment is worth the expansion and brand familiarity franchising will bring to you. If you don’t have enough capital, you can go for a franchise business alternative financing option to help you out.

It may be a great opportunity to invest in a franchise and become a franchisor. But before you choose a franchise investment and sign a franchise agreement, do your homework, understand what the franchise system offers and get a qualified franchise lawyer’s support. Practically, franchising is a low-cost means to expand your small business and not a no-cost strategy.


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