How To Expand Your Business With The Leverage Of Franchising

Small and Medium Enterprises (SMEs) have been termed as the engine of growth of an economy. This implies that they have been recognized as the major variable for promoting private sector, development, and partnership in an economy. Copious literatures have been written on Small and Medium Enterprises indicating historical experiences of economic growth and development in various countries replete with success stories of the salutary effect and positive impact and contributions of SMEs in industrial developments, technological innovations, and export promotion. However, SMEs in developing countries face enormous challenges in attracting investors and accessing modern technology to enhance growth. Among these challenges is an inability to achieve economies of scale through integration or linkages, and the problems of size and relative isolation caused by the difficulties in entering national and global value chains driven by large multinational corporations. The most common barrier to expansion faced by today’s small businesses is a lack of access to capital. Even before the credit-tightening of 2008-2009 and the “new normal” that ensued, entrepreneurs often found that their growth goals outstripped their ability to fund them.

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In a bid to expand SMEs, various strategies have been suggested by different authors. For any Small and medium business willing to grow in a sustainable market, it is recommended that franchising should be adopted.

Franchising is a marketing concept which can be adopted by an organization as a strategy for business expansion. It is a type of business that is owned and operated by an individual (franchisee) but that is branded and overseen by a much larger—usually national or multinational—company (the franchisor). Where implemented, a franchisor licenses some or all its know-how, procedures, intellectual property, use of its business model, brand, and rights to sell its branded products and services to a franchisee. In return, the franchisee pays certain fees and agrees to comply with certain obligations, typically set out in a franchise agreement.

Adopting a franchise system business growth strategy for the sale and distribution of goods and services minimizes the SME's capital investment and liability risk. Franchising is an alternative form of capital acquisition in that it will allow small and medium businesses to expand without the risk of debt or the cost of equity.

However, since the franchisee signs the lease and commits to various contracts, franchising allows for expansion with virtually no contingent liability, thus greatly reducing the risk to the franchisor. This means that as a franchisor, not only do SMEs need far less capital with which to expand, but their risk is largely limited to the capital they invest in developing their franchise company—an amount that is often less than the cost of opening one additional company-owned location.

The franchise system is not an equal partnership, especially due to the legal advantages the franchisor has over the franchisee, but under specific circumstances like favourable legal conditions, financial means, transparency and proper market research, franchising can be a vehicle of success for both franchisor and franchisee.

In addition, franchising is certain to aid a small and medium business in capturing a market leadership position before its competitors encroach on its space. Franchising not only allows the franchisor financial leverage, but it also allows it to leverage human resources as well. Franchising can allow small and medium-sized business to compete with much larger businesses than theirs, so they can saturate markets before these companies can respond.

How do SMEs expand business with leverage on Franchise?

To start with, the SME in question will do well to recognize or identify its strengths. This can be accomplished with the use of the SWOT analysis matrix. The SME is also expected to have a solid business plan, as it going to be carefully selecting its franchise owners and ensuring tight control. The franchisee should get in details the competitive strategy, business concept, marketing strategy and of course the location strategy of the business.

According to Newman, to ensure an expansion of business through franchise, such business should build up its share of the market first before opening franchises outside its immediate area. It is important that such business fully penetrate its home market first, then gradually grow its base and expand outwardly.

Another way by which an SME can expand through franchise is to have a good robust business model to perform well and be a formidable competitor in its industry. The enterprise needs to use its early franchise location to test out and perfect its concept. The business model should be capable of perfecting the economic feasibility, product appearance and so on.

The businesses involved should ensure that all necessary legal documents such as franchise contract, licenses and registration are put in place as this also contributes to the success of a franchise relationship.

Just as with hiring employees, choosing franchisees can have a huge impact on the success or failure of a small business. It is harder to manage franchise owners because they have invested their own money and want to run their own show. So, choosing wisely is key by making sure that the franchisee candidates have a passion for the business, the necessary financial and business savvy to do the job and that the franchisee can maintain the high standards of the business.

In conclusion, for every franchising agreement, it is very pertinent that the franchisor stays in close touch with the franchisee even after the familiarization period so that growth of the brand can be achieved alongside the success of the overall organization.

Author – Gbolahan Owoeye

Posted in SME Newsletter.