One of the primary reasons businesses decide to embark on the franchising path, is the lack of capital required for growth. When experts are discussing why franchising occurs, they refer to this as the theory of capital constraints.
The challenges arising from paucity of capital for a start-up franchisor could be because they underestimated the costs involved.
In some cases, it’s because they need outlay money to prepare the business for franchising before they can receive any capital from new franchisees joining their network. So, regardless of whether you decide to franchise or not, it’s still likely that you will face a low capital growth problem. This is why it’s important to take stock of the situation and ascertain whether it’s really feasible to franchise your business. The answer to the question is entirely dependent on your current level of preparedness and individual circumstances.
If you don’t have sufficient funds to launch and operate more outlets to demonstrate the proof of your business concept, you’ll need far more capital before you start franchising, than businesses that already have numerous outlets. Establishing new outlets to determine the proof of concept might be required, regardless of whether or not you choose franchising as your preferred growth strategy. In simple words this is more of a generic capital need, rather than one exclusive to franchising.
Aside from this, there are some other aspects you would have to take into consideration. It’s important that you refine and document your operating procedures; establish an effective monitoring system to remotely access the outlets’ performance. These actions would involve costs that you would have to incur regardless of the business expansion strategy you choose. The other unavoidable costs that have to be factored into the plan include:
These costs are specific to franchising that generally won’t be found in any other growth strategies. For these costs alone, the capital needed will vary based on the business’ nature. For instance, if your business is a home-based, mobile service, these expenses would be almost equal to/slightly higher than the price at which a franchise may eventually be offered.
Contrastingly, if you have a retail/fixed location business which is far more complex than a home based one, you will also incur higher expenses post fit-out, and acquiring stocks and equipment etc. Subsequently, the franchising-specific costs will be proportionately higher as well. Only after all these expenses have been incurred will your business be truly ready for a franchise expansion. If you don’t have enough capital to cover all these aspects from the outset, the chances of franchising successfully are very limited. There are examples of franchises that boast of having started out with negligible amounts of capital; however, they too later admit that given a chance, they would do things very differently, plan things better and organise resources and capital beforehand.
If you are planning on franchising your business, you have to carefully assess the costs of preparing your business for expansion and preparing it for franchising before taking the dive. It’s a good idea to take the advice of a franchise consultant; they will be able to give you a 360 degree view of the situation so you are better-prepared for contingencies and any challenges or hurdles that present themselves along the way.
If you want to know more about setting up a franchise business or want some advice, feel free to get in touch with us at The Franchise Institute. You can call us on 1300 855 435 or fill in this contact us form and we’ll reply as soon as we can.
Thanks for reading,
The Franchise Institute Team
1300 855 435