Is franchising better than building a business?

Aunty B,

Do you feel that franchising is better than building a business with employees?

Thanks,
Richard,
Perth

Dear Richard,

Oh dear, let me guess. You want to grow fast and you don’t have any money?

Well, franchising can be great, but it can also bring a whole world of pain.

Franchisees’ capital will help you open stores quickly and spread your brand around the country fast. With skin in the game, so to speak, franchisees are often highly motivated to make their business work. They will work harder and longer than employees, and in a service business this can make the difference between success and failure of the chain. (Although recent research shows nearly a third of franchisees buy in for “lifestyle” reasons so maybe this is not always true.)

In any case, the fact that franchisees have invested their own capital in your business, and probably staked their family home on it, means they are likely to have much higher expectations of you than even the most engaged and committed employee.

To have a successful business you must have excellent relationships with your franchisees. You have to keep them in the loop, make decisions that take account of their interests, and help them make money.

If your franchisees are not making money, and this may not always be your fault – you won’t be either within a very short period of time.

The other thing to worry about is recruitment. It’s even harder to find good franchisees these days than it is to get good employees, so you’ll need a sexy brand and a great growth story to win the hearts and minds of cashed-up and well-qualified potential franchisees.

Last time we had a slowdown in the economy, large companies sent retrenchees packing, with healthy packages. These were enthusiastically invested in franchised businesses. Think Jim’s Mowing and Forty Winks. It was the beginning of the franchising boom.

This time things are different. If we are heading into a quieter period, people are still likely to be retrenched – especially in the banking and finance sector – but they are less likely to be cashed up on departure.

And there is a final warning on franchising – you’ll have to spend a small fortune gearing up for franchisees. You need manuals, disclosure documents, legal agreements and good advice before you head down this path. It is highly regulated. Just ask the ACCC or the Franchise Council of Australia.

But if you’re not scared of growth in a slowing economy Richard, go for it!

Aunty B