To Franchise or Not to Franchise

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Is That Your Question?

At some point most successful business owners and managers will consider expanding their businesses. But which method of expansion should they use? How much will it cost? What additional personnel will be required? How long will the expansion program take to complete? What return on investment will the expansion program provide?

TKG has offered a highly specialized consulting service for the American business community, providing franchise expansion expertise since 1973.

Entrepreneurs, corporate executives and professional service providers depend on the advice of TKG Partners who provide expert advice in matters of franchising, licensing and other methods of market and corporate expansion. We have earned the confidence of bankers, attorneys, accountants, and seasoned business executives as a result of the many business expansion services we have provided. Our responsibility, integrity, and in-depth experience in virtually every phase of franchising qualify us to meet your business expansion requirements.

Franchising, as a method of distribution of goods and services, has developed into a major segment of the world economy. Franchising includes a great number of commercial enterprises in numerous industries, all of which provide unique elements of their marketing and distribution system to the franchisee. Franchising is one of the few business systems that, by its very nature and purpose, creates new business entities.


Growing through company-owned expansion, as opposed to franchising, can be accomplished with outside borrowed capital, but borrowing money isn't always easy, if at all possible. Equity funds can be a source of outside capital and some successful businesses are able to procure funds through the stock market or venture capital. But at what price? In exchange for investment capital, a business owner must give up equity in the business. Giving up a share of the business can also mean giving up a degree of control. And, if growth isn't achieved quickly, the stock market can be very unforgiving, as can venture capitalists. Partnerships and Joint Ventures are also an option; however, they also require giving up some control in the decisions and strategy for growth. Family and friends are usually more understanding and may not require an active role in management decisions, but all too frequently tensions can arise and cause personal problems. In the event that outside capital can be raised, the process of company-owned growth can be slow. Office or other facilities must be located and selected. These facilities must be leased or built. Managers and employees must be interviewed and hired. And, these activities are usually spread over vast areas of geography. Why franchise? Because franchising avoids the obstacles of slow, company-owned growth, the problems of obtaining outside capital, and the challenges of finding the right employees. Essentially, franchising solves the problems connected with capital, time and personnel. And, it does so in creative ways: Capital. Franchising transfers almost the entire cost of expansion to franchisees. Franchisees build the building or pay the rent, purchase the inventory, pay the employees, and provide the working capital until sales make the business profitable. And, the growth of a franchise is limited only by the number of people willing to buy the franchise and the number of locations that can be sold. What is the cost to the franchisor? Frequently, it is far less than it would cost to establish a single new company-owned unit. Time. Does your company need to move quickly to surpass competitors in the marketplace or capture market share? Do you have a new, innovative concept? Do you want to exploit a new marketing opportunity? Franchising is the fastest method of market penetration. A franchise company can grow quickly simply by selling individual units. Or, a franchisor can grow even faster by selling multiple units or territories to sub-franchisees. Quite simply, it is usually faster to open franchises than company-owned units. Personnel. Finding and hiring good managers to run your units in far away cities is very difficult. But that is something you already know. Franchisees make excellent managers because they have a vested interest in the success of the franchised business. They own it. Through franchising, your company can have both dedicated managers and relief from the problems associated with hiring and firing personnel. 2

Many businesses are discovering that converting their company-owned branch stores, offices or warehouses to franchised units allows them to grow faster. For some companies Branchising may be an ideal growth alternative in the event that debt or equity funding is not available or practical. Branchising allows a company to sell off company units and realize an infusion of needed capital but retain ongoing profits in the form of royalties and continuing service fees or profit on product sales. In some cases, large, well-financed public companies grant franchises to their employees at no cost as part of a long-term growth strategy. The day-to-day management challenges within the company units are then transferred to the franchisee (former employee) who has the interest and desire to build his/her own business. Other benefits are usually reflected in a higher sales price by selling company units individually as franchises as opposed to selling the business in bulk. However, when the company is a large public entity the motive to franchise is usually based on enhancing the performance of each individual office and building employee morale. Branchising allows a company to take advantage of the use of entrepreneurial ownership nationally and internationally, in both the public and private sectors, as a way to build high performing enterprises and improve corporate performance.

Franchising, as a business relationship and technique for the expansion of a distribution system, has many zealous supporters. However, not every company is a good candidate for the franchising system. The following can be excellent alternatives to franchising in some instances:      Distributorship, Dealership and Trademark Licensing Joint Ventures and Limited Partnerships Management Incentive Equity Programs Going Public-IPO or Reverse Merger Leveraged Employee Stock Ownership Plans (ESOPs)

If you have interest in franchising or alternative growth strategies for your business and would like to have a confidential discussion, please contact me, or visit our Web site at Please review our Client List of private and public companies. Several of these public companies began as Franchise Development clients and subsequently engaged our firm to assist them with their process of “Going Public.” Sincerely, Carl J. Kosnar Managing Partner 3

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