When you franchise your business, you are essentially selling your business concept to others. This in turn, raises capital for your core business and serves as a constant revenue stream due to the nature of franchise agreements.
The others, or franchisees, that want to buy your business concept, are basically paying you for your business model, brand, use of suppliers, and marketing. In return, franchisees typically pay you a large upfront licensing fee, and an on-going percentage of their revenues.
Thus, depending on the amount of licenses you issue to “investors,” you can raise a substantial amount of capital. Although the relationship between yourself and franchisees may be different from traditional venture capital or angel investors, the concept is still very similar. In both cases, you are raising venture capital to fund your business, only in this case, the terms are different. In fact, franchising is the only form of venture capital funding that does not require you to give up ownership in your company.
Franchisees buy into your business, but for different reasons than traditional venture capitalists or angel investors. They themselves are convinced by your business model, and want to “own” their own business without having to come up with a brand new concept. By buying a franchise license, they can own their own business and reduce the risk that many start-ups face, such as implementing an untested business model and initial customer perception of the idea. For you, this means not having to give up any ownership, while still expanding your business and raising capital at the same time.
The other great thing about franchising your business is that these investors have a direct stake in their investment. Their hard work pays them directly in terms of revenues. More importantly, the harder they work, the better your franchise’s image will be, and your revenues will also grow as a percentage of theirs’. Should the franchisee fail, you and your core business incur no penalties or direct costs.
However, there are some downsides to franchising your business model. Although your direct liability to your franchises may be limited in terms of losses in case of failure, you’re still required to provide them with the keys to your business model, as that is what they paid you for. Often times, this means an extensive initial training program for the franchisee, as well as ongoing training in order for the franchisee to adapt to on-going changes. Furthermore, you’ll typically have to expand your marketing efforts in order to provide sufficient marketing for all of your franchises.
Remember that your company’s image is also dependant on your franchisee’s actions. Even though it may not be a “corporate-run business,” the public won’t make a distinction should something go wrong. We’ve all heard the horror stories of chicken-feet in McDonald’s Chicken McNuggets, or coffee that was served too hot and resulted in a lawsuit. Both of these incidents caused McDonalds to suffer a blow to its image and bottom line, even if the restaurants in question were run by independent franchisees.
Franchising your business is best done once your business model is proven, since that is the primary draw for investors. However, there have been cases where unique business models have been franchised at very early business stages.
How to Get Funded in 90 Days or Less
If you need funding fast, you have to use Crowdfunding.
1. It’s fast. You’ll get the money in just 90 days or less.
2. It’s easy. You don’t even need a business plan – you can get started right away.
3. You keep ALL the money. It’s not debt, and you don’t you don’t give up any ownership in your company either…