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Both sides benefit

Franchising has grown rapidly over the past 25 years and is now considered one of the most effective methods of growth for successful businesses wishing to expand. A franchise development program permits multiple units to be opened simultaneously, gaining the franchisers an advantage over competitors.

A franchise is not confined to its own capital resources and employees, and can therefore expand more quickly than centralized enterprises. In this way, it can seize market share and rapidly become a dominant player in a new or even an established market. 

Franchisees also assist the franchise by investing their own motivation and capital. Overall operating costs (especially advertising and marketing) are divided by the franchisees.

Other advantages include:

Greater buying power. Franchisors purchasing products and services for their entire franchise network can often negotiate volume discounts from vendors and suppliers. This provides higher operating margins to franchisees and a competitive advantage over similar businesses. For example, a franchise can purchase supplies (like hamburger) and services (like advertising) in bulk, threatening to place its large orders elsewhere if it does not get the best price. These discounts, which neither the franchisor nor its franchisees could get on their own, are then enjoyed by both franchisor and franchisees.

Greater name recognition. As additional units are opened, name recognition usually increases. This increases the value of the business to both the company and its franchisees.

New revenue streams are created. Frequently, a franchise produces substantial revenues in relationship to the services performed for the franchisees. Franchisors may earn income from the franchise operation(s) from all or some of the following revenue streams:

Research and Development. Franchise fees and royalties can supply capital for R&D that the franchisor could not afford as a stand-alone company, permitting it to improve its products and services.

Minimum financial risk for the franchisor. Many established national and international companies have chosen to operate under a franchise system due to the simple fact that franchising provides the opportunity for maximum growth and market penetration with minimum financial risk to the franchisor.

The franchisor has firm control over the franchise branches. A franchise system permits the franchisor to maintain strict controls over individual franchise locations, protecting the reputation and system of the franchisor.

Franchisees are responsible for all aspects of his or her location. The franchisee is personally responsible for all aspects of his or her franchised location, including capitalization, day-to-day operations and personnel.

Lower cost in comparison to internal expansion. Franchising offers the franchisor tremendous advantages over the high capital costs associated with internal expansion as well as the infrastructure and employee training demands that accompany internal expansion.

No need to search for a qualified work team. The problems associated with recruiting, training, managing and retaining a qualified work force, as well as the responsibilities for the day-to-day operations of individual locations, are virtually eliminated under a franchise system.

Shared costs for larger savings. Additional benefits of franchising include significant cost savings that can be achieved by the franchisor and franchisees from volume purchasing, and shared advertising and marketing expenses.

Franchisees are motivated for success. Companies who choose franchising as their method of expansion benefit from the franchisees’ being business owners rather than company employees. With their own savings at risk and standing to gain from any success, the franchisees are more motivated than employees to make the business succeed, which solves the problem of hiring qualified and motivated employees when expanding company operations.

Franchisees seek to purchase franchise to minimize risk. Each year, thousands of would-be entrepreneurs choose to purchase a franchise, rather than start a business on their own to minimize their risks by purchasing a system of operation that has proven to be successful.

Franchisees benefit from the franchisor’s expertise. Franchisees benefit from the franchisor’s experience and expertise, as well as from the operational support and training the franchisor provides.

Franchisees are responsible for day-to-day operations. In establishing a franchise operation, franchisees, rather than employees of the company, are responsible for the day-to-day operations at their locations.

The franchisor can focus on overall business development. This frees the franchisor to focus on overall business development, including operational processes and procedures, product or service research and development, advertising and marketing.