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Corporate vs Franchising

It might be time to grow your business if:

  • Customers are asking if you plan to open a location in their area
  • Customers are asking you about franchising your business
  • You are having success and are considering opening an additional company store
  • You see other businesses expanding and think “that could be me”

 

Once you have given consideration to expanding, the next step is determining the best method to grow your business. Corporate growth can require considerable effort and time, not to mention the financial and human resources needed to grow a business. Lastly, expansion through franchising is built on the efforts of your franchise owners, who are qualified people having the desire, finances, and commitment to successfully grow your business with you. This overcomes the traditional obstacles of your growth. Consider the role of the Franchisor and Franchisee in opening a new location, as well as the requirements of corporate growth.

corporate vs franchising chart

In many cases, the financial rewards of franchising exceed those of adding an additional location. As an example, consider our case study of a fictional cookie company. The owners, who we will call Roman and Isabella, have decided to expand their business because of the success of their current store, and are deciding between franchising and opening an additional corporate store. Based on the experience of operating their current business, Roman and Isabella estimate that an additional corporate store will have:

Startup Investment$168,000
Expected year 1 revenue$458,000
Profit Margin10%
Total Lease Liability
(1,600 Sq.Ft. @ $30 per Sq.Ft. x5 years)
$240,000

Roman and Isabella have also carefully studied the financial performance of cookie franchises currently operating in the market and learned that the franchisors generate revenue in the following ways:

Franchise Fees per unit$25,000
Average Royalties (% of sales)6%
Average Food Rebates and Additional Revenue1%

Roman and Isabella have learned from International Franchise Association (IFA) statistics that the median sales for a first year franchisor is between four to six franchises, so they believe they can sell five franchises in the first year. The owners estimate that based on the staggered openings of the franchises throughout the course of the year, the average annual revenue generated per franchise will be $300,000 in year one. Finally, Roman and Isabella know that they are capable of supporting the opening of the five franchise locations with their current infrastructure and will not incur any incremental cost increases.

Corporate Store

Year 1 Revenue$458,000
Investment & Liability
Startup/Opening Investment:$168,000
Total Lease Liability:$240,000
Total Investment & Liability:$408,000
Cash Flow Generated:$45,800

Franchisor

Year 1 Revenue:

Franchise Fee Per Unit:$25,000
Royalties Per Unit:
(6% x $300,000)
$18,000
Rebates Per Unit
(1% x $300,000)
$3,000
Total:$46,000
Franchises Sold & Opened:x5
Total Year 1 Revenue:$230,000
Investment
Franchise Program:$68,000
Franchise Marketing Investment:48,000
Total Investment:$116,000
Cash Flow From Franchisor:$230,000
ROI:11%ROI:198%

Our example makes the assumption that five franchises will be sold in year one based on current IFA statistics, which results in $125,000 in franchise fees and $105,000 in royalties and rebates per year from franchises sold in the first year alone. More importantly, the royalties and rebates become a continuous stream of income over the term of the franchise agreement. Based on a franchise agreement lasting ten years, that equates to $1.05 million in royalties over the life of the term for just these franchises. And when you consider the additional franchise sales in each following year, you quickly see how franchising your business can become very lucrative.

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