Franchising Your Small Business - the Fly Speck Part Five

"Franchising is a valuable business model for companies because it is financially lucrative, providing a mechanism for reducing a company's risk while enhancing its returns on invested capital." - Shane, From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company

Will a new geographic location be successful business-wise? Let the franchisees find out. They will bear some of the risk and can test out new markets. Also, you can pass of the risk and cost of liability for customer injury - in a franchise system the franchisor's have limited liability for the injuries to customers in retail outlets whereas the operators of company owned outlets are liable for customer injury.

Franchising at Amazon

A Look at Franchise ROI

"The financial return on an investment is composed of three factors: the amount of capital invested to generate the return, the revenues resulting from that investment, and the costs of generating those revenues." - Shane

ROI is higher in franshises - why? Low costs - franchises have fewer employees per dollar of revenue compared to company owned outlets making cost structure very low. Due to the fact that royalites are typically collected monthly and bills paid quarterly, the working capital needs for the franchisor can be negative! Also, incentivized owners do not need to be supervised as much as salaried managers.