Is Franchising the Best Option?
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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 take the leap, it’s worth considering a few alternatives first.
Keep in mind, 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 – so it’s smart to consult a lawyer. Also, the Federal Trade Commission sets strict rules on what is or isn’t a franchise – and you don’t want to inadvertently run afoul of FTC rules.
Here are three alternatives to franchising.
1. “Business opportunity” or licensing.
By FTC definition, when you set up a franchise, you’re providing a common trademark (generally speaking, your brand name) for all of your franchisees to use. 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 federal disclosure requirements as would a franchisor, which makes the legal documentation and the sales process less complex – at least at the federal level. That said, a biz op, as it’s commonly known, will need to comply with a patchwork quilt of state laws (as well as some state franchise laws) in 26 different states.
The main drawback, though, 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 programs, operations manuals or management advice – or else the FTC will likely deem you to be operating as a franchisor.
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. And even if you could license your trademark, you’d have to think carefully about whether you’d want someone to use your name without the ability to control how they use it. A single rogue operator could destroy the brand that took you years to build.
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. Or you could allow others to be sales representatives, where you collect all revenues and pay them a commission to sell your product or service. Another option would be for you and another party to create a joint venture in which you would share ownership of the business – and your only compensation would come in the form of profits (or losses).
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 maximize the value of your business model.