If the Business Is So Profitable, Why Is It Franchised?

By Utomo NjotoSenior Franchise Consultant, FT Consulting

 

Many prudent investors asked this question, “If the business is so profitable, why is it franchised? The franchisor can get a bank loan, can’t they?”

It is always being an intriguing question, “If the profit is higher than the bank loan, why does the franchisor not go to the bank anyway?”

“We want to share the profit while sharing the risk,” most franchisors say.

“Ah, are they really so sincere, willing to share the potential profit with us?” many skeptical investors question the sincerity of the franchisors.

Then here comes the real reason, “We do not have enough collaterals to get bank loans to expand at full speed.”

Here are the reasons why a business is franchised:

The Business Risk

Ok, this is one of the real reasons. And if it is the only one that motivates the franchisor, he will usually franchise the business in high-risk area only. Because, in fact, they will open their own outlets in areas with the lowest risk.

Not Enough Capital & Collaterals

When a franchisor who does not have enough capital and collaterals finds a very potential location, he usually will welcome any prospective franchisee to open the business in that location. In fact, some banks are willing to finance a prospective business with no adequate collateral if the business has a good history and track record. So, most probably, this choice will only be applied when the franchisor does not have enough credential to get this favorable arrangement with the bank.

Share of Mind & Availability

Speed of business expansion has become a need when a company desires to increase the availability and its brand exposure to the audience or population. This high exposure will result in high share of mind with an expectation of getting a high rank of top of mind.

Of course, being at the top of mind may not make us be the brand leader. Even if we have reached the position, yet somehow, we do not have a strong business fundamental, we may finally fail.

Operational Supervision

For some franchised business, supervision is the crucial reason. The franchisor may have enough capital and collaterals, but it is not easy for him to supervise remotely. Even, for a business with a high risk of shrinkage, it needs the owner to be there on a regular basis or on a frequent non-scheduled basis.

Besides we have to admit that employees are usually work better when the owner is on site. So, that would be another reason to franchise the business: quality of service.

HR Management

Businesses with high employee turnover will need high involvement of the owner to recruit and train new employees. Some “cart franchises”, known as “Business Opportunity” offered in Indonesia, are characterized by this high turnover problems. High profit with high employee turnover will typically force a business person to franchise his business, especially when he is expanding to the other cities.

Unique Business Competition

As it is known, every business has a unique competition wherever located. And, in fact, local brand leader is hard to cope with. For example, the business of English courses in Indonesia: LKPT in Yogyakarta, TBI in Bandung, Briton in Makassar, and the three big players in Jakarta: LIA, EF and ILP.

Relating to the matter, franchisees are expected to search for information about the activity of the competitors. Further, local investors are the best to develop network with local potential market. If the investor is not ready to be in daily operation, hiring a qualified manager would be a must in this case.

If you think of any other reasons to franchise, do let me know by sending email to utomo@consultft.com