Although franchising is a widely known approach for company development, it is not necessarily the only approach for business owners looking to grow their companies.
Franchising necessitates significant financial investment, operations and maintenance regulation, advertising (brand building), and regulatory adherence. Owing to these factors, several entrepreneurs choose alternative means other than the franchise model.
Howbeit, apart from the franchise model which is used by companies including Subway, Taco Bell, and Hampton Hotels, owners of small companies can develop other channels of growth. A potential franchisor must take into account not just whether their business is franchisable, but also whether franchising is the ideal growth strategy to seek.
Numerous entrepreneurs don’t want the complications that emerge with onboarding franchisees, so they look for alternatives. Below are some simple paths to expand your company without franchising.
What are the Alternatives to Franchising your Business?
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The emergence of additional company-owned branches is probably the most apparent approach to growth for numerous businesses. Compared to franchising, this approach has numerous benefits.
Company-owned development offers entrepreneurs the platform to retain most revenues from every unit instead of distributing them to franchise owners. It as well gives owners more control over unit operations by allowing them to employ and fire managers whenever and wherever.
Of course, in addition to the benefits, there are certain drawbacks. The first and probably most important consideration is danger. While you get to retain 100% of the income, you also have to bear 100% of the setbacks. And the more funds you put into company activities, the more at risk you are. Full control entails greater responsibilities.
A joint venture relationship is distinguished by the dissemination of both ownership and earnings rather than by the payment of fees. For instance, your joint venture partner could stump up around 70% of the capital and work for a below-market salary for one year.
You would then contribute 30% of the investment, sign a banknote personally, as well as provide your intellectual property. Depending on your agreements, you may eventually wind up with a 60/40 split in ownership interest. Your 40% will authorize you to 40% of the earnings spread – but only until profits are spread.
You’d also have to pay income tax on 40% of the firm’s documented earnings, regardless of whether no profits were spread.
As such, if the dominant partner, for instance, opts to make a capital investment in the firm (which cannot be tax-deductible) rather than a distribution, you will be expected to pay the taxes even when you didn’t see any of the funds. Indeed, one serious problem that individuals who utilize a joint venture structure face are establishing and monitoring profits.
Even in partnerships where the dominant partner is genuine and well-intentioned, monitoring sales and profits for a single entity could be time-consuming.
Another word of warning: Any joint venture that ends up paying premiums to the intellectual property owner will be considered both a joint venture as well as a franchise, regardless of whether the intellectual property holder is among the joint venture partners.
If you offer your service via a direct-to-consumer sales force, then you run a distributorship. A distributor will leverage your brand assets as well as service marks to promote your product, but they typically have much more freedom in how they operate the company, especially when put in comparison to a franchise system.
Distributors possess one-on-one business agreements with vendors of their preference, as well as the ability to purchase in mass, allowing them to do business with a wide range of businesses instead of being restricted to a particular franchisor-controlled system.
In a broad sense, distributors do not demand total technical assistance or training. As a result, your intervention may be far scarcer than in a franchise contract.
Over the last couple of years, the co-op framework has grown in popularity. Unlike a franchise, in which a product firm develops policies and guidelines for licensees to try to emulate, co-op member companies make the decision regarding how the corporation is managed particularly for the benefit of the participants.
Ace Hardware and True Value Hardware are two well-known general merchandise chains that are frequently misidentified as conventional franchises but operate effectively as co-ops. Cooperatives are as well prevalent in the medical, general merchandise, agricultural, artistic, and culinary industry sectors.
A licensee pays for the privilege to use your brand name under a licensing agreement. In contrast to a franchise, your franchisees operate their companies autonomously. You, as the license holder, receive royalties as well as oversee license usage, but you have no control over how the company operates.
Licensees can select their own vendors, develop their own standard operating procedures, as well as select what locations and marketplaces to conduct business in. Apple Computer, Canon Inc., and Woolmark are illustrations of licensors.
In an agency formation, an autonomous sales associate works to sell your product or services on your behalf; thus, this type of arrangement is really only suitable for businesses where contract fulfillment is offered by the company rather than the agent.
The simple difference is that all the cash goes downhill (from company to agent) rather than slightly up (from the franchisee to the franchisor).
However, in this sort of arrangement, if your agent for any reason accepts cash and sends it to you, the bond has transformed to become the fee component of the franchise law. Nevertheless, these interactions are characterized by low brand recognition, high demand, and support-specific profitability erosion.