Unlike employees, franchisees make an initial payment in return for becoming a part of your business and then they continue to pay you a percentage of their revenue, throughout the duration of their Franchise Agreement. This means that the costs of setting up the franchise, training staff and launching the business are all covered by the franchisee rather than by the parent organisation. Similarly, once the business is up and running, it is the franchisee who will be rewarding you with a monthly income, rather than being paid by you as an employee. For these reasons, the franchise system can provide a very cost-effective route for business development, but only provided that the original business is successful and that the franchisor is willing to invest sufficient time and money into creating an attractive franchise opportunity.
Franchisees are themselves responsible for the day-to-day running of their business units and they must do this strictly in accordance with the Franchise Agreement and Operating Manual. As franchisees have invested their own hard-earned money, they do not require the detailed level of management which would be needed for employees. The objectives of the franchisee and of the franchising organisation are, therefore, very closely aligned, with the success of the one depending to a great extent on the success of the other. As a result, the franchise network requires only a simplified and relatively low-cost management system. This is typically based on the close monitoring by the franchisor of the key performance indicators (KPIs) and the provision of motivational leadership.
The benefit of self-financing business units and a simplified management structure as described above usually means that franchised networks can be expanded more quickly than company-run networks. Franchising is all about replicating a clear and successful business formula and, provided the franchisor is prepared to make a reasonable investment in marketing at national level, the brand can quickly be expanded nationwide. This will in turn generate increased sales volumes and stronger purchasing power, via which the organisation can command greater discounts from its suppliers.
Better Market Penetration
Franchisees are normally well established as part of the local community, either on a personal level or as a result of their past business activities. This can give them a very significant advantage in gaining new business for the franchise at a local level. They will generally live within the franchise territory, be known there and will be seen as having made a permanent commitment. These are all attributes which generally do not apply to company employees and will be of enormous value in helping franchisees to penetrate their local market.
Franchisees have invested in their business and know that they can benefit directly from its success. Logically, for that reason, their commitment will be much greater than that of employees, who have made no such financial investment and are guaranteed to receive at least a basic wage at the end of each month, regardless of performance. However, money is not the only driving force for better performance. Since the business is their own, franchisees will take real pride in the service which they provide and will ceaselessly strive to exceed the expectations of their customers. This commitment will also reflect in their loyalty to the franchisor’s brand, because it is also the franchisee’s brand, and they are intent on building up a business which can be sold on for profit at some future date. Of course, not all potential franchisees are so strongly motivated – nor do all have the necessary ability to succeed – so the franchisor’s initial selection process must be rigorous.
On purchasing their franchise, the franchisees are really taking a decision to stick with their chosen business for the long term. If they leave prematurely they are unlikely to realise the full potential of their franchise investment and they may possibly lose everything. Even when the time is right to sell, it is their own responsibility to find a suitable buyer. This means that the franchising organisation is generally freed from the time-consuming and tedious task of continually recruiting and re-recruiting managers for its business units. As for recruitment of staff within the franchises themselves, the responsibility for this task clearly rests with the franchisee, not the franchisor.
If you have longer-term aspirations to expand your business internationally, the franchise system again has many advantages. Using a system called Master Franchising, you can quickly and simply replicate the whole of the your UK franchise model in another country, leaving the Master Franchisee to adapt the model to the local market – its language, business customs and legal requirements. This is a very effective method of expanding a business overseas without any need to create subsidiary companies or branches in your chosen countries.