Pros and cons of franchising a business

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Dear Professor Bruce:My business is doing well and I want to expand. Some friends have suggested franchising. But I don't know if I should do it. What are the pros and cons of franchising my business? Answer: Franchising helps businesses to grow but it also has certain disadvantages. According to Scott Shane, author of "From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Business," and professor of entrepreneurial studies at Case Western Reserve University, "franchising offers many benefits to entrepreneurs who are trying to grow their companies."Among the benefits:-- It's a very effective mechanism for finding talented outlet operators and giving them an incentive to work hard. The most qualified and hardest working people are going to find it more attractive to invest in a business and keep the profits from running it rather than taking a straight salary managing a business for someone else.-- Franchising helps you to get the money and people that you need to grow your business rapidly. Because your franchisees put up the money to build new stores and manage the day-to-day operations of the business, you can grow the number of locations in your chain much faster than if you had to use your own money and people to add locations.-- Franchising can generate high financial returns at relatively low risk. When you franchise, you put relatively little money into adding each location. If your business is successful, you can earn very high royalties from sales at those outlets.Franchising also has some downsides.-- Your franchisees are independent businesses with different goals, which can easily conflict with yours. This most commonly occurs when franchisors get royalties as a percentage of sales, while franchisees make profits from running the outlet. Anything that boosts sales, but not profits, will create conflict.-- Your franchisees have an incentive to free ride off each other's efforts to generate business. For instance, your franchisees might try to get out of paying for the advertising that's needed to get customers, figuring they will get the customers anyway if the other franchisees buy the advertising.-- It's a lot harder to innovate with franchising than if you own your own outlets. With franchising, if you come up with a new idea, you have to negotiate with your franchisees to get them to accept the new product or point-of sale computer system or whatever else you want to introduce that's new instead of just putting the new idea in place.For further information, please visit http://weatherhead.case.edu/faculty/faculty.cfm?id=14051(Bruce Freeman, owner of a small business and an adjunct business professor at Kean University, is always looking for interesting success stories and lessons learned. Entrepreneurs can e-mail their ideas to bfreeman(at)proline-com.com or visit www.smallbusinessprofessor.net.)