Why companies decide to franchise
Franchising is a method of distribution and it is all about getting the product or service to the end user.
Snap-On is a very successful American business that manufactures precision tools. The business has managed to achieve global coverage through franchising. It has a manufacturing base in the States and distribution depots in the various countries that it operates. The tools are then delivered to the end customers by the franchisees.
Similarly if you look at Oscar Pet Foods, a manufacturer of pet foods, they work on the same principle - the franchisees deliver the product to the customers’ door steps. Chemex is another example of this wherein they have a network of franchisees who deliver the product to the consumer.
The range of difference businesses available is vast. All sorts of businesses are franchised, for instance pet care, fast food, hotels, accountants and home care.
To answer the question of why companies franchise, the first thing is time. For small businesses in particular the time needed to develop a network can be quite substantial. With a franchise it can be a lot faster simply because the franchisee is going to do all the leg work. They are going to find premises, they will be finding the vans and the equipment. From a time point of view you can generally expand quicker under a franchise arrangement than an employed model.
The second thing is people. Franchisees are by definition people who have got skin in the game. They have invested a large sum of money, quite possibly the biggest investment they make after buying their home. They will be focused that they get the business to work. They will go the extra mile to make a business work.
Money is a key thing as to why businesses franchise. You use other people’s money to expand. They buy the assets needed for the business, they do the marketing and they employ the staff. So from the point of view of cost, it is a very cost-effective way of expanding.
The next question is why do people buy franchises? Well the first thing is that when a potential franchisee looks at a franchise opportunity they will see it is a proven business. If they follow what the business plan it is pretty likely they will achieve the same level of success as the franchisor has. The risk for them has been reduced – it has not been completely irradiated but the usual risks that are involved with starting a business have been reduced.
Support is a major influence as to why someone might invest in a franchise. They know they have someone there to guide and help them with the key things to help them run their business. People who come into franchises are often from a variety of different backgrounds and they may not have a broad range of commercial skills. The support they get from the franchisor is a very valuable part of why they buy a franchise.
Then you have ambition. Franchising taps into the wide number of people who have an ambition to be self-employed. Increasingly people are encouraged to think about being their own boss and some are frustrated about being an employee. Many will look at franchising as a way of achieving the ambition of self-employment.
To franchisees, franchising is ‘supported self-employment’; being in business for yourself but not by yourself which equals less risk. To franchisors, franchising is a dynamic method of cost effectively expanding and achieving the highest standards of service.
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