Franchising is perhaps the world’s most powerful growth vehicle, but it’s not the only choice for a company looking to bulk up its distribution channels. Before you franchise your business, it’s worth considering a few alternatives first.
Keep in mind that each of these options present some disadvantages, including loss of control, inability to build a brand and potential increases in liability. Just like franchising, these methods may also be expensive or legally cumbersome.
Here are three alternatives to franchising.
1. ‘Business opportunity’ or licensing.
If you don’t wish to start a franchise, one option is to allow a person to open a cookie-cutter version of your business, under their own name. This is called a ‘business opportunity’ or a license. As a licensor, you don’t have to comply with the same disclosure requirements as would a franchisor, which makes the legal documentation and the sales process less complex.
The main drawback is that you won’t be able to build a valuable common consumer brand this way. That can put you at a significant disadvantage when competing with franchisors, who can use advertising to promote a common brand. But if branding is not important to you, this is certainly a viable option.
2. Trademark licenses.
A second option is to simply license your trademark, which is quite similar to what a franchisor does. But here’s the difference: By definition, a franchisor also must provide ‘significant operational support’ or exercise ‘significant operating control’. When you’re a trademark licensor, you can’t provide such assistance or control – such as training me, operations manuals or management advice.
Unfortunately, very few of us own businesses where the name is so valuable that people would pay for it without also requesting help in establishing the business itself.
3. The ‘no fee’ route.
The third alternative to franchising involves offering interested parties an option that doesn’t involve any fees. That doesn’t mean, of course, that you give up profits. But you have to structure these transactions in a way that’s markedly different than franchises, which by definition collect initial fees, royalties, advertising fees, training fees and/or fees for equipment.
So, for instance, you could charge no fee but allow someone to start a dealership or distributorship, making money on the bona fide wholesale mark-up of your products to them.
To decide whether any of these alternatives is better than franchising, ask yourself three basic questions: Do I want to build a common brand? Do I want to control the brand or provide assistance to my operators? How do I want to be compensated?
Once you’ve answered those questions, it’s easier to determine which expansion strategy is most likely to maximise the value of your business model.