Franchising your business can be an attractive option for owners of existing businesses and entrepreneurs alike. When determining the best way to set up your business, it is advisable to speak with an experienced business attorney to talk through the pros and cons of franchising and determine if it is right for your business. At Newburn Law, our business attorneys have experience advising business owners regarding the franchising process and would welcome the opportunity to visit with you today. Contact us at 303-847-4987 to set up a free consultation.
What Is Franchising?
A franchise is a business relationship between a franchisor and a franchisee. A franchisor develops a company's brand and system of operation, while the franchisee pays the franchisor to use the brand name and receive support and training from the franchisor. A simple and common example is a grocery store. A business owner may want to open a grocery store, but instead of starting one from scratch and applying as a new business with the state of Colorado, they may buy a franchise of an existing chain. In exchange for upfront fees and royalties, the franchisee receives the right to use the name of the store, as well as the benefit of joining a larger network of businesses. As a franchisee, you typically receive from the franchisor:
- Training materials and hands-on training
- Shared supply network
- Marketing and public relations materials
- Business advice
- Many other benefits from an already established business
Why Franchise Your Business
The franchisee is not the only one who benefits from the franchising relationship. As a franchisor, you can grow your business very rapidly and improve profits while offering opportunities to motivated entrepreneurs to run your locations. Below are several reasons why to franchise.
Access to Capital
When you agree to franchise your business, you provide the franchisee with a vast array of resources, including your expertise and reputation. In exchange, they are providing you with capital. Whereas in other business arrangements, you would be responsible for raising capital from investors in the form of stocks or business loans, franchising your business is a fast way to raise money because the franchisee covers all the capital needed to start up the business. This allows you to grow the brand of your company and expand your locations without incurring too much debt.
Limiting Your Company's Liability
Although your franchise company is typically responsible for a significant portion of the business, such as branding, marketing, supplier relations, etc., one benefit of franchising is that the franchisee is the actual owner of the business for purposes of legal liability. For example, if your grocery store business owned and operated a store, and a person slips and falls in that store, your company would be liable for the damages that result. On the other hand, the franchisee who owns and operates that business location is the legal business owner who takes responsibility for the actions of the business.
Efficient Management Structure
Just as the franchisee is responsible for the business's legal liabilities, they are also responsible for the day-to-day management of the store according to the franchise agreement. Where a large corporation would have to hire managers to supervise each store, who are paid on a salary basis, the daily management of a franchise often means the owner is more involved because profits are on the line. When each location has an owner who is motivated to see the business succeed, not only will that franchise do well, but your franchise company will as well.
More Profits for Your Franchise Company
As a franchise company, most of your revenue comes from initial franchise fees and ongoing royalties. Royalties are usually in the form of either a percentage of each franchise's gross sales or a fixed monthly fee. Because the franchisees are keeping the bulk of the sales revenue, it is important to keep your franchise company running lean.
This is possible because many of the core operational functions of your business are delegated down to your franchisees. They are responsible for recruiting, staffing, human resources, accounting, and many other overhead functions that would otherwise sit at the corporate level and eat into profits. Without having to handle all of these traditional management roles - and pay the corresponding salaries - you can streamline and reinvest those profits into growing your business.
Downsides to Franchising
Franchising is not right for every business. If you enjoy running your business every day, you may not want to put control of the business in the hands of franchisees. Below are some reasons why you may not want to franchise your business.
Although running a franchise business is generally less labor-intensive than running the franchise itself, that sometimes comes at the expense of profits. Rather than earning sales revenue, your company is generally limited to the fees and royalties from the franchises, which can sometimes be disheartening for business owners driven by sales and revenue.
No matter which industry you work in, there is always the risk of conflicting personalities. With a franchise relationship, there is a complicated management structure. Although the franchisee must adhere to the franchise agreement and operating manual, you are technically not their manager and have no other authority. When you, as the franchisor, and the business owner, the franchisee, do not see eye to eye, it may be difficult to hand over the reins to someone you do not agree with or trust.
Lack of Management Across Network
While one of the upsides of franchising your business is that your managers - typically the franchisee - will be motivated for their franchise to perform extremely well, one downside is that they may not be as loyal or motivated for the network as a whole to perform well. Because your managers do not technically “work for” your company, there may be a lack of cohesion across locations.
Talk to a Corporate Lawyer About Franchising
If franchising seems like it may be a good fit for your business, you want to make sure your company is protected. At Newburn Law, P.C. we strive to explain all of the types of business arrangements available for our clients. When you franchise your business, there is a wide range of legal and financial consequences. Call us at 303-847-4987 to talk to one of our experienced business attorneys and tell us more about your business.