The primary advantages for most companies entering the realm of franchising are capital, speed of growth, motivated management and risk reduction — but there are many others as well.

 

1) Expand without capital

The primary reason most entrepreneurs turn to franchising is that it allows them to expand without the risk of debt or the cost of equity since the franchisee provides all the capital required to open and operate a unit, it allows companies to grow using the resources of others.

2) Acquire motivated management

It is difficult to find and retaining good managers. Franchising allows the business owner to overcome these problems by substituting an owner for the manager. However, we can’t underestimate the importance of finding franchisees with the right business and managerial skills as well as motivation for success. Franchisees typically have long-term commitment; they are very motivated; they are better-quality managers; they improve operational quality and they innovate.

3) Pick the right people and develop a strong innovative culture

Perhaps the single biggest mistake made by novice franchisors is to sell franchises to candidates who are not truly qualified to run them. If you own a franchise business, selecting the right person to purchase a franchise from you is crucial to the success of your business. After all, this person will represent your brand to customers.

The financial and credit requirements for franchisee applicants always comes first in your screening process. The single biggest factor to consider when choosing a franchisee is capitalization. Inadequate capitalization is the most common reason for franchisee failure, so every new franchisor should closely examine liquid net worth, net worth and the candidate’s credit score.

However, passive investors will not help your business grow. Owner-operators, if properly selected, typically have better unit-level performance (both from a quality and from a financial perspective)-they’re more attentive to details and more concerned with quality and customer satisfaction than most managers.

Start by determining what kind of a person you need. It’s a good idea to develop a “job description” that summarizes the major work outcomes, processes, equipment used, work environment and skills required to successfully operate one of your franchises. Does he have intelligence – measures such as a candidate’s work history, academic achievements, vocabulary and general presence help to provide clues? Is he a hard worker – look for the way a prospect conducts his life? Ask prospects about their “average day” and their hobbies. If it sounds like a 40-hour week will wear them out or they brag about their two-handicap on the golf course, you can pretty much figure they’ll spend too much time away from their franchise after they join your system.

Relationship skill factors, such as honesty, personality and compatibility, also play a part.

Generally speaking, we recommend that franchisors avoid highly entrepreneurial candidates. Franchisors are better served targeting straight-A students with long-tenure to their corporate jobs. Entrepreneurs tend to have several definable characteristics: They tend to have moved from job to job and have frequently already started at least one business of their own. They tend to drive fast cars, have lots of traffic tickets and are frequently divorced. True entrepreneurs tend to be rule breakers-and that is the last thing a franchisor should want.

Once you’ve found applicants who meet the financial requirements, you can apply the tools and processes used in selecting employees: Interviews, references, practical assessment exercises and perhaps psychometric evaluations.

As a practical assessment exercise for your franchisee applicants, you may want to bring them on for on-site training at your existing locations. This will allow you to evaluate their operational skills and their ability to learn and direct activities related to the business.

4) Expand the network at faster rate

Keep that competitive advantage and leadership by accessing the market and saturating it with more stores before the competition does.

5) Leverage staffing

Franchising allows franchisors to function effectively with a much leaner head-office organization since franchisees will assume many of the responsibilities.

6) Simplify supervision

The franchisor is not responsible for the day-to-day management of the individual franchise units. By eliminating these responsibilities, franchising allows you to direct your efforts toward improving the big picture.

7) Increase profitability

The staffing leverage and simplified supervision mentioned above allows franchise organizations to run in a highly profitable manner. With your guidance and support, it is the franchisee who undertakes site selection, lease negotiations, local marketing, hiring, training, accounting, payroll, and other human resources functions (just to name a few).

8) Improved valuations

The combination of faster growth, increased profitability and increased organizational leverage helps account for the fact that franchisors are often valued at a higher multiple than other businesses. So when it comes time to sell your business, the fact that you’re a successful franchisor that has established a scalable growth model could certainly be an advantage.

9) Penetration into new markets

A typical franchisee will not only be able to generate higher revenues than a manager in a similar location but will also keep a closer eye on expenses. Many franchisors have been able to expand to other provinces or states and even internationally. Of course, you never want to consider a market you don’t feel provides the franchisee with a strong likelihood of success.

10) Reduced risk

The franchisee is the one who executes leases for equipment, autos, and the physical location, and has the liability for what happens within the unit itself.

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