Franchising as an Expansion Strategy

By Eileen Proctor of SBTDC Raleigh 

So you’re operating a business that by most standards is considered successful. You want to share your product or service with a wider customer base and garner more revenue, and to these ends, you’re considering expanding to additional locations. 

Opening and effectively managing more than one location will most surely require additional expense and manpower that even the most seasoned business owners may not be in a position to implement and manage. That’s why you might consider the expansion strategy of franchising. It’s a powerful growth strategy because it allows businesses to scale rapidly with lower financial risk while leveraging the entrepreneurial drive of franchisees. 

What Makes Franchising an Effective Expansion Strategy?

• Access to expansion capital. Unlike corporate-owned expansion, franchising shifts much of the financial burden to franchisees who invest in the physical aspects of their own locations, covering costs like real estate, equipment, and initial inventory. This allows the parent company, now known as the franchisor, to grow without relying heavily on loans or outside investors.
• Faster market penetration. With multiple franchisees opening locations in different geographic locations simultaneously, a brand can expand more quickly than if the company had to open each unit itself. Having multiple locations across different markets builds credibility and trust with consumers. Furthermore, franchisees bring local market knowledge, making it easier to enter new regions successfully.
• Lower operational risk for the franchisor. Franchisees are responsible for day-to-day operations, staffing, and local business management, reducing the franchisor’s operational complexity and overhead costs and allowing the brand to grow without the burden of managing a vast number of employees.
• Motivated and invested operators. Unlike corporate managers, franchisees have a personal financial stake in the success of their location and are personally incentivized to maximize sales, customer service, and profitability. This often results in better-managed locations compared to those that are company-owned.
• Shared marketing & advertising costs. Many franchise systems have national or regional advertising funds, where franchisees contribute to collective marketing efforts. This allows for more robust brand promotion without the franchisor bearing the full expense.
• Predictable revenue streams for the franchisor. Franchise fees and ongoing royalties provide a steady income stream without direct operational involvement.
• Scalability without loss of control. Franchising allows businesses to grow while maintaining control over brand standards, products, and services through franchise agreements.

Sounds perfect, right? Not necessarily. While expanding a company through franchising can indeed be a powerful growth strategy, it requires careful planning and execution well in advance of jumping into the development of a franchise opportunity that will be poised for success. 

Key Considerations and Questions to Ponder

Business Model Viability

• Is your business profitable and replicable in different markets?
• Can operations be standardized for franchisees to follow?
• Do you have a strong brand identity and customer demand?

Financial Readiness

• Can you afford the costs of franchising (legal fees, documentation, training, marketing, etc.) which can conservatively run $250,000+?
• Will your franchise model provide enough revenue through franchise fees and royalties?
• Do you have the capital to support early franchisees before generating significant returns?

Legal & Compliance Requirements

• Are you prepared to develop franchise contracts, a Franchise Disclosure Document (FDD) and comply with FTC regulations?
• Do you understand state and international franchise laws?
• Are trademarks and intellectual property fully protected?

Franchisee Support & Training

• What training and ongoing support will you provide to franchisees?
• How will you ensure brand consistency across all locations?
• Do you have a franchise operations manual to guide franchisees?

Franchisee Selection & Management

• What qualifications should franchisees have (experience, financial stability, cultural fit)?
• How will you recruit and vet potential franchisees?
• What level of control and oversight will you maintain?

Scalability & Market Demand

• Is there strong demand for your product/service in new territories?
• Have you conducted market research to identify ideal franchise locations?
• Will your supply chain and logistics support franchise expansion?

Brand Protection & Marketing

• How will you maintain brand reputation as the network grows?
• Will you provide national or regional marketing support?
• Do you have a strategy for handling franchisee compliance with branding guidelines?

Franchise System Profitability

• Is the franchise fee and royalty structure attractive yet sustainable?
• Will franchisees have a reasonable path to profitability?
• How will you balance your profitability with franchisee success?

Ready to Franchise Your Business?

If the aforementioned “pros” and considerations leave you with a positive feeling, franchising may indeed be a great expansion approach for you and your business. But if that’s not the case, fear not! There are other potential strategies to consider, including corporate-expansion and licensing, which we will cover in future articles. Stay tuned!