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If you’re waiting for all the economic indicators to line up like ducks in a neat row before making a move toward expanding your company, your business will continue to tread water and perhaps fall short of growing to its full potential. Uncertainty can be challenging, but there’s a reason that the old saying, “the future belongs to the bold,” still rings true.
Being bold, however, means moving forward diligently, by seeking out relevant opportunities, forming strategic partnerships, and employing appropriate ways to strengthen and expand your product line or services. Being bold does not mean being reckless or jumping into new ventures with both feet – and no shoes.
In this article, we’ll explore a variety of methods that business owners can employ to expand their brands. And, of course, as a franchise consultant who’s been in the franchising industry for five decades, I’ll start with what I call the “greatest growth strategy ever.”
The What’s and Why’s of Franchising
Historically, franchising does extremely well both in strong economic climates, as well as in uncertain, even recessionary times. And with all the recent discussions about tariffs, interest rates, global instability, and more, franchising is proving it can maintain its predictably strong footing.
There are a variety of sound reasons why franchising gets a boost from a slowing economy, in particular – including displaced corporate refugees who want to take control of their own financial earning power, for one. These are typically people who can and want to own their own business, but like the idea of having a proven system to fall back on: they’re risk-takers willing to take on certain amounts of risk but with a safety net.
Other factors that make franchising particularly viable during uncertain economic times include access to readily available real estate, or to suppliers willing to negotiate advantageous terms, or to numerous and sometime creative franchise funding options.
For a company looking to expand, an important motivation to franchise is that it allows a business to use other people’s time and money to grow. There’s a maxim that fits here as well, this time from management guru, Peter Drucker: “The best way to predict the future is to create it.” So, to create a viable future for yourself and your company, you can’t remain stagnant while your competition is keying into major consumer and market shifts.
Side Bar: The Franchise Basics
Here’s a quick refresher on what constitutes a franchise in the eyes of the law. Fourteen states require registration before franchise sales can commence, which includes filing a detailed Franchise Disclosure Document (FDD), but all states fall under Federal Trade Administration (FTC) guidelines.
To be considered a franchise, a company must display three traits: It must license the use of its trademark; it must supply ongoing support and training or other forms of ongoing control or support; and it must collect fees, which typically include an initial fee plus ongoing royalty fees. In some cases, marketing, product sales, and other fees (such as technology fees) are collected on a regularly scheduled basis as well.
The litmus test for being a franchise is to employ all three attributes. If you’re not doing all three, then you’re not offering a franchise model.
All this said, franchising is not always the right solution for everyone. There are other ways to grow if franchising your business does not make good business sense for your brand. Good advice here is to tap into knowledgeable industry resources who can help you determine whether franchising is the right strategy for you, or if other options should be explored. As part of that exercise, here I present some alternative growth ideas to consider, with pros and cons for each.
Company-Owned Operations
For full control, stick with an all company-owned unit strategy. This strategy allows you to keep 100 percent of the profits from each unit rather than taking a percentage of sales. Another benefit is that you don’t have to train your current staff (nor hire additional franchise support staff) to handle the franchise side of the business. You can keep your eye on the business at hand without the distraction of running a franchise system. The downside means you’ll be taking all the financial risk yourself and doing all the work at both headquarters and at the unit level. And the most obvious fact that is that you have to line up the necessary capital or financing to grow at a pace that allows you to reach your personal financial goals.
Licensing Agreements
Licensing works well in situations where a branded concept is brought into nontraditional settings, such as airport or college campus locations, kiosk settings, and more. Plus, licensing is a legal agreement between the two parties that is not regulated by the state or federal government, at least, not with the same rigor that franchising is.
One form of a license is a trademark license. The main difference between a trademark license and a franchise relationship comes down to whether you want to control the day-to-day operations of the business and whether you are going to provide support to the licensee. What constitutes control can be as simple as getting overly involved in site selection decisions, supplying training manuals, or weighing in on operational issues. The term applied to this is “significant assistance,” so it is important to note that providing support as a licensor can get you into trouble with the regulators, as it is easy to you cross the line and provide support that could be deemed significant – thus creating a franchise relationship. Bottom line: if you do not have a strong brand that stands on its own, this option is probably not for you.
Alternatively, if you don’t want or need others to use your brand, you can always license your business’ intellectual property and operational plan, but prohibit the use of your trademark in association with the business. This strategy, called a “biz op” or a business opportunities license, can minimize the risk of a third-party compromising the good will your name has earned. Of course, if you choose to go this route, you do not have the opportunity to build a brand and create the brand loyalty and value associated with that brand.
Where people typically get into trouble with licensing is the inability to give up control. It is, after all, your concept, your products or services that you developed with your blood, sweat and in some cases, tears. You have to be able to allow your licensees the freedom to make at least some decisions for their business that you might not normally make.
While the control and revenue issues are ones to seriously ponder, there are ways to protect your brand and system, while still expanding your presence, via a well-developed license agreement. Consult with your business lawyer and advisors to be sure you’re covering all the bases – and, in the end, make sure that you don’t inadvertently offer franchises, which can get you into legal hot water.
The No-Fee Options
Finally, to help avoid being categorized as a franchise, another strategy is to not collect any ongoing fees during the lifetime of the agreement. The question then becomes how you will make money from the third party.
If you want to share in profits and not take any fees, you can structure the relationship as a joint venture (JV). JVs are, however, traditionally hard to manage if you are looking for aggressive growth, as each of your partners will be running businesses independently and your ability to generate profits will be entirely dependent on their ability to turn a profit. Unlike a franchise, where your royalty gets paid in good times or bad, in a JV, when times get bad, you are on the hook for the losses. And you will also share in the unit-level liability for anything that goes wrong.
If you are a manufacturer and want help to expand your product line, you may want to consider dealership and distributorship structures. The strength of this model is that the relationship is fairly straightforward. A third party buys your products at a wholesale price (the exclusion under the Franchise Rule) and then marks them up to sell retail. Just remember: any services or support you provide to your dealership or distributorship will ultimately come out of your wholesale margin, as some states will retroactively consider you a franchise even if you start charging fees to your channel years later.
A similar arrangement for a service-oriented business is an agency relationship, in which an independent agent sells your products or services to a third party, but you fulfill the order. You pay the contracted agent, and you collect the money from the person who buys the services. These relationships are thought of as “top down” relationships, as the monies paid by consumers go to you first and then to the agent later, thus eliminating the “fee” portion of the definition. It’s important to keep the agency relationship independent, however, otherwise you’ll be responsible for taxes and benefits if the government determines it resembles an employer/employee relationship (i.e., a sales representative).
Final Thoughts
Your professional, personal, and financial end goals as a business owner are what should drive your expansion decisions and how you move forward. Finding the right path forward for your concept involves some soul searching, extensive research, and surrounding yourself with the right advisors that can help you run through the benefits and disadvantages of different expansion strategies, so you can make a decision that is right for your unique set of circumstances.
We advise our clients to avoid thinking about the labels, and to instead think about the best business structure to reach their goals. If it meets the legal criteria of a franchise, then be sure to comply with those laws. But start with the end in mind and work backwards to determine the best path forward for your business.
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Written by Mark Siebert.
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