One question I often get is, “Why franchise?” Before I can answer this, it’s important I define what it means to be a franchisee or franchisor. A company that licenses its trademarks and methods is called a “franchisor,” while an individual who pays to use a franchisor’s trademarks and methods is called a “franchisee.”
Franchisees open replicas of the franchisor’s business and run them with the continued assistance of the franchisor for a contracted period. In exchange, the franchisor receives a recurring payment, a percentage of gross sales or a fixed fee. Many companies operate and behave very similar to a franchise but legally are designated as “dealerships” or “co-operatives.” As a bank, CIBC supports all types of franchise concepts regardless of legal designation.
So back to the original question, why franchise? The answer is simple when you consider the following benefits to franchisors and franchisees:
1. A franchise business is capital-light at the franchisor level
As the capital required to grow the business and open new locations is at the franchisee level, the franchise system can grow quickly while allowing the franchisor the ability to dedicate available capital to the corporate infrastructure required to support its franchisees in other areas.
2. A franchise business provides “ease of entry” and “proof of concept” at the franchisee level
While a franchise model typically requires that the bulk of capital outlay be addressed by the franchisee, financing for this capital outlay is readily available to franchisees through an established and highly competitive market for franchise lending and ancillary banking services.
For larger, multi-site and regionally-based franchisees, there’s also a growth in investment by private equity firms as they recognize the quality of franchise networks as an investment vehicle. What this comes down to is: ready access to capital provides for ease of entry for qualifying new franchisees; and proof of concept provides the confidence that lenders and private equity firms need to consistently deploy capital.
A franchise business is considered lower risk than a traditional non-franchise business
A franchise is a lower risk business model for many reasons. To begin with, the banner is usually a proven business, typically with a lengthy track record of success. Then there is the significant support provided by the franchisor to the franchisee to consider, which includes operational support, site selection, training and marketing. Lastly, as each franchise location is an extension of the brand, the franchisor has a vested interest in the success of each location and supports its franchisees accordingly.
When you think about the benefits I’ve shared, and that according to the Canadian Franchise Association, “in the past five years, 97% of franchises opened in Canada are still operating today compared to 51% of independent businesses over the same time period,” the question should really be, “why not franchise?”
CIBC has been supporting franchisors and franchisees for over 25 years. If you’re involved in a franchise system and looking for advice on growing you business, then don’t delay. Contact our franchise experts today.