Why franchise a business

Key factors for deciding whether or not franchising a business is a good idea

As a system of associated businesses, franchising is seen these days as the ideal solution for renewing existing trade, since it represents an evolution toward specialization and management quality for the small business. However, not all companies can be franchised.

In order to franchise a business, you have to analyze the feasibility of the model, based upon the following conditions:

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  • That the company is profitable and healthy.
  • That its business activities have been sufficiently validated, in other words, it has been operating successfully in the market for at least a few years.
  • That it is well-positioned in the market where it operates.
  • That franchising will allow business growth to be optimized, when compared to opening new corporate locations.

Why do companies decide to franchise?

There are many reasons for this, which we will summarize below:

  • For economies of growth: The franchisee directly pays for the investments and expenses involved in opening the new establishment, so the franchisor company does not need to cover these.
  • To avoid structural excesses: Unlike internal expansion, which will require hiring of additional employees and a significant increase in the expenses associated with this, franchising allows expansion to take place using external personnel.
  • For cost-effectiveness: When a business is expanded through franchising there is greater motivation for success and for proper operation of the business.
  • For the speed and extent of growth: Expansion is not conditioned upon the availability of financial and human resources, which makes it possible to expand quickly, with a multiplier effect that will strengthen the brand's presence in its various markets.
  • For ease of control: The franchisee's incentive for achieving success and profitability with its own company will make the franchisor's management supervision easier.
  • For economies of scale in management: The greater speed of expansion will bring along with it access to larger economies of scale, which will allow for better planning of the supply functions.
  • To promote the brand: Marketing efforts become more cost-effective since franchisees contribute advertising funds, independent of any promotions they may also carry out at the local level.
  • For influence on the business environment:
    • In terms of customers: Advantages compared to a traditional distribution network: fewer intermediaries, better control options, quick decision-making, reduced returns to stock, etc.
    • In terms of suppliers: Involvement in creation of the franchising plan.
    • In terms of competitors: Leadership by initiative, in order to cover the market.
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