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Franchising Basics

The Franchisor's Perspective

What Motivates a Business to Offer a Franchise? The answer to this question will help a potential franchisee become a more knowledgeable consumer. Understanding the franchisor's perspective can help the franchisee select a franchise and negotiate its purchase.

More Rapid Expansion. A primary reason for a business to become a franchisor is the capability to expand more rapidly. A lack of capital and a dearth of skilled employees can slow business expansion. The franchisee provides both when a new outlet is opened. A franchisor may assist a franchisee in obtaining financing for a new business, but the franchisee bears the liability for repayment of the funds. In addition, the franchise owner usually is selected because of his/her business experience and management skills. Thus, a franchise operation is a mutually beneficial proposition for both the franchisor and the franchisee.

Higher Motivation. When a business franchises its operations, it acquires a motivated group of managers. Each manager is an owner and has a high level of motivation for success. A manager is also more accountable for actions because the manager as an owner is totally responsible for business outcomes. This means that a potential franchisee should ask why a franchisor wants the franchisee to purchase a franchise. If the only benefit a franchise brings is money, the franchisee should be cautious about why the franchisor wants to do business.

Capital. There is another advantage to franchising a business. It allows a company to raise money without selling an interest in the business. The franchisor uses franchise fees for business expansion. Issuing stock often results in reduced control and less profits per shareholder. Loans are often given with certain provisions attached and cost a significant amount of money in the form of interest paid. Franchising is an alternative that overcomes these disadvantages. However, it is useful to explore some drawbacks faced by a franchisor.

Image. The name and image of a company are at risk when it is sold to other individuals. Thus, a franchisor is often quite particular about quality and the standards that franchisees are expected to meet. Franchisors therefore usually designate very specific business practices that franchisees must follow. The concern over image also helps explain why many franchisors reserve the right to buy back a franchise operation. Potential franchisees can take comfort in the fact that most franchisors want to see them succeed. This also motivates franchisors to provide the support necessary to help achieve success.

Less Profitability for Franchisor. Another disadvantage to a franchisor is the sacrifice of profits. A company-owned outlet is often more profitable than a franchise. In addition, the company owns the outlet's assets. A potential franchisee should consider future motivations of a franchisor when purchasing a franchise. Will the franchisor try to buy back a business after a franchisee invests the time and energy to make the operation profitable? A franchisor should view the success of a profitable operation as beneficial to both parties.

Potential Competition. Franchising a business also has the liability of training competitors. Franchisees may learn how a business operates and then decide to replicate the operation under another name. This has happened to some franchisors, so it makes others cautious. A good franchisor will try to establish a positive relationship with franchisees to avoid this problem. The restrictions placed on franchisees are usually balanced by rewards in an attempt to retain their loyalty.

As you review a franchise agreement, keep in mind the franchisor's perspective. Look for an agreement that takes a balanced approach. A good franchisor is one that desires to create a relationship where both parties are winners.

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