For a small business owner looking to expand, one option to consider is the selling of franchises. In a franchise arrangement, the business owner sells the rights to open a new unit to another party, who agrees to follow the franchisor's successful business model as well as pay the franchisor a percentage of the sales. Franchising offers several advantages for the business owner.
If you're looking to expand quickly, franchising can be an effective way to achieve rapid growth. When you franchise, you don't have to go through the process of obtaining financing like you would with a typical expansion. Instead, the franchisee supplies the capital and assumes the bulk of the risk that comes with any new business venture.
Franchises create passive income for you, which is income that requires little effort on your part. Typical franchise agreements require that the franchisee pay royalties to the franchisor, which usually ranges from 5 percent to 15 percent of gross sales.
Because your franchisee is assuming the risks and rewards that come with business ownership, she is likely to be highly motivated to make her franchise a success. This means more income in the form of royalties for you. In contrast, if you opened a new unit on your own and hired a manager to operate it, motivation may not be as high because the manager may not have a financial stake in the outcome.
Low Failure Rate
The three-year failure rate of franchises is 2 percent to 4 percent, which is much lower than the 65 percent rate for typical new businesses, according to the Frandocs website. This is because the franchisee is required to follow your successful business model, which eliminates many of the mistakes often made by new businesses. A high success rate means more royalties for you, the franchisor.
Little Operating Expense
A franchisee is an independent contractor and not your employee. This means that the franchisee bears the responsibility of common operating expenses, including payroll, marketing, taxes and the cost of renting or leasing a building and equipment. In some cases, the franchisor will help the franchisee obtain the necessary financing to get the business started but does not actually co-sign for any loan.