Franchising as a Growth Strategy for Small Business

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When it comes to market expansion, franchising offers a win-win growth strategy. | Photo Credit: Wikimedia Commons

At its core, every business venture is about winning the revenue game, and every business knows too well that this doesn't come handy.

This explains why as early as the planning stage all ideas about every aspect of business operation are being evaluated and analyzed. Some business combines it with a cutback in discretionary spending while others pursue expansion.

When it comes to market expansion, franchising offers a win-win growth strategy. Aside from the opportunity to expand economically, franchising offers a business structure that may pave for a long-term financial gain.

Defining Franchising

Franchising is a business partnership between a franchisor and a franchisee. The franchisor is the current legal owner of a franchising enterprise while the franchisee is the party interested to replicate the business in another location.

The franchisor and the franchisee are legally bound by a franchise agreement. Guided by the terms in the contract, both put something in the franchising relationship. The franchisor gives up a certain degree of control over its trademark in exchange for an initial fee and a pre-agreed portion of revenues. The franchisee, on the other hand, burns some financial capital in exchange for a brand name and a business model that are already established. The franchising entity utilizes the operations and processes determined by the franchisor. It also receives marketing and public relations support from the same.

In franchising, a territorial right is accorded to a franchisee. It is the franchisor's duty to ensure that a given territory is appointed to the rightful franchisee. The franchisor should ensure also that none of the other franchisees would try to compete for the same customers. According to Marketing Intelligence and Planning, the 50 percent rise in lawsuits relating to franchises since 1990 were due to territorial exclusivity. When observed properly, this feature can provide a competitive edge to the franchisor because it can be an effective means to develop trust to current and future franchisees.

According to the Journal of Consumer Marketing, the use of franchising as a growth strategy can be attributed to two factors: financial and human capitals. Both capitals are critical inputs in any expansion project.

Through franchising, a small business may experience rapid growth without the need for a significant sum of financial capital. Franchisor does not employ a franchised store's employees. It is the franchisee's responsibility to pay for their salaries. With less payroll expenses and additional revenue through initial and monthly royalty fee, a small business has a greater chance of finding a solution to its financial constraints.

Additionally, a small business finds strategic human capital through the franchisee. The franchisee provides a managerial skill without wielding the same time and effort usually indispensable to evaluate, hire, and train a new employee in a managerial capacity. On the franchisee's end, it is on its advantage to observe guidelines laid out by the franchisor and ensure delivery of excellent products and customer services consistently. These factors are crucial to the franchised store's revenues, which in turn impacts the franchisee's return on investment (ROI).

Before small business owners make the decision to jump on the franchising wagon, they should first get themselves familiar with franchising essentials namely trademark, franchise disclosure documents (FDD) and duplicable systems of management.

Franchising Essentials: Trademark, FDD and
 Duplicable Systems of Management

Ideally, small business owners should not wait until they are ready to register a trademark. As early as the startup stage, legal ownership of any term, logo and design should be secured. After all, trademark is the basic unit of a franchise system. It is the core value of the franchising package being sold to a franchisee. While protection of intellectual property (IP) in the United States is strong, the World Wide Web makes any valuable concept a subject of infringement from countries with particularly weak IP protection.

Aside from trademark, small business owners should also be familiar with the parts and contents of FDD specifically item 19. FDD contains detailed disclosure of the franchisor's direct and indirect parent companies, lawsuits, bankruptcies and interests of any officers in any approved suppliers. On the other hand, item 19, also known as financial performance representations (FPRs), is one of the 23 items stipulated in FDD.

Under the franchise rule, franchisor should provide FDD to a potential franchisee before signing of any binding contract. A franchisor, however, is not legally bound to provide FPRs. In case a franchisor does otherwise, they must be disclosed in the FDD. Any claim should also be supported by financial documents. Small business owners intending to franchise should understand the ins and outs of this legal document. Once they become franchisors, they already assume certain legal responsibilities to their franchisees.

FPRs can be an effective and low-cost sales tool. It can be used to convince prospective franchisees that the small business is thriving, and it has competitive standing before its target markets. Moreover, interested party usually asks for the actual or projected financial performance of a business before making any decision. For as long as every claim of profitability is backed up with statistics, market research and/or financial documents, a small business can use FPRs to its advantage.

Another franchising essential business owners should get familiar with is the duplicable systems of management. This feature is essential because the degree to which a small business franchise can penetrate target markets sustainably is largely influenced by the rate to which its systems of management can be replicated. A prospective franchisee may only decide to franchise a business with a proven way of operational management.

It is strategic for a small business to test the business model, develop it and provide clear documentation in the form of operations manual before kicking out a franchising project. A pilot operation, which is managed like a franchise, but is being run by the franchisor, would be a great way to refine the business model. A deal may also be secured with a trial franchisee whose responsibility is to work with the franchisor to refine the franchise structure. In exchange, the trial franchisee may receive attractive deals like 50 percent off the royal fee for the first year, monthly motivational meetings, quarterly sales and marketing trainings, an all-expense-paid trip annually for three years and/or 10 percent more of the gross margin in two years.

A duplicable business model for a franchise system cannot be conceived overnight. It may need a period of trial and error for a franchisor to develop and present a realistic, detailed and replicable manual of operations. Once a business model has been aged and matured through trials and errors, a small business is set to a journey of long-term financial gain. However, a small business owner should always remember that a built-to-last franchise system is always win-win: both the franchisor and franchisee gain leapfrogging toward the flagship of the revenue game.

References

Bureau of Consumer Protection Business Center. 2008 May. "Franchise Rule."http://business.ftc.gov/documents/franchise-rule-compliance-guide

Fock, Henry Kwong-yin. 2001. "Retail outlet location decision maker - franchisor or franchisee?" Marketing Intelligence and Planning, 19(3): 171 -178.

International Franchise Association (IFA). 2012 December 17. "Franchise Business Economic Outlook for 2013." http://www.franchise.org/uploadedFiles/Franchise_Business_Outlook_12-17-2012.pdf

Sen, Kabir. 1998. "The use of franchising as a growth strategy by US restaurant franchisors." Journal of Consumer Marketing, 15(4): 397-407.

 

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9 Responses

  1. Bob
    Hello, i think that i saw you visited my site thus i came to “return the favor”.I'm trying to find things to improve my website!I suppose its ok to use a few oof your ideas!!
    • Reinalyn Terrado
      Thank you for visiting my website and leaving a comment. Keep on reading! :)
  2. Hi Mercedes! My go-to business sites are entrepreneur.com, forbes.com and businessweek.com. I hope it helps. Have a great day! :)
  3. Hi there! This is my 1st comment here so I just wanted to give a quick shout out and tell you I truly enjoy reading through your blog posts. Can you suggest any other blogs/websites/forums that go over the same topics? Appreciate it!
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    • Hi Meir! Thank you for leaving a comment. As for me, I will always take quality over quantity anytime as far as writing is concerned. Start writing what interest you the most. From there, you can work on the frequency of your publications and then you move to consistency until you're able to polish your approach and style. Happy reading and writing! :)
  5. Hi Meir! Thank you for leaving a comment. Suggestions are very much welcome here! You may contact me via the Contact Me tab about your recommendations. Have a great day always! :)
  6. This is a topic which is close to my heart... Thank you! Where are your contact details though?
    • Thank you for leaving a comment. You can reach me through the contact form in the Contact Me section. Just click the main Contact Me tab. ;) I'm not yet half-way in the process of content migration, but I hope to fill every section of the site by the end of the month. Keep on checking and reading. Have a great day!

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