Growing a business often means expanding into new markets. When your business has maxed out its local operations and you want to break into new markets, there are a few ways you can go about it. Opening the new locations yourself gives you complete control over the expansion. This is very hands-on, however, requiring you to raise capital, negotiate leases, hire workers, and juggle a host of other duties. To enjoy the benefits of expanding your business but wish to delegate the heavy lifting to others, consider franchising or taking on affiliates. These methods grow your company while shifting a lot of the hard work and risk to independent business owners. Both strategies have advantages and disadvantages; which one is right for you depends on the nature of your business and what your goals are.
Differences Between Franchises and Affiliates
Both franchises and affiliates are operated by independent business owners who contract with a company to sell products or services on the company’s behalf. However, the terms of the relationship between independent business owner and company vary greatly between the two models. In a franchise system, independent business owners, known as the franchisees, buy into the business model and own locations of the business. Affiliates, on the other hand, simply own the right to sell products and services on the company’s behalf. Companies typically charge an up-front fee to new franchisees and then take a percentage of the franchise’s revenue each year. Rather than paying an up-front fee, affiliates give up a larger revenue split on sales.
Franchising Advantage: Multiple Income Streams
Franchising your company offers a couple of ways to make money. First, there’s an up-front fee to new franchisees. This franchise fee confers the privilege of carrying your company’s name and sharing in the benefits of the home office’s marketing and branding efforts. Depending on the value of your company’s name in the marketplace, your franchise fee might be anywhere from a few thousand dollars to millions of dollars. Companies also take a share of the money a franchise earns. If you sell a franchise to an independent business owner with an agreement that stipulates the business owner pays 7% of revenue each year, and the franchise makes $1 million in revenue its first year, your company earns $70,000 from the franchisee’s efforts that year.
Franchising Disadvantage: Hands-On
While franchising isn’t as hands-on as expanding into new markets with company-owned locations, most franchise agreements specify that the company must do a few things on behalf of the franchisee. For example, businesses run marketing campaigns, such as TV and radio spots, in the cities where they maintain franchises. They also provide franchisees with training and support, offering varying degrees of handholding during the new business owner’s first few months or years. If you’re looking for a hands-off or nearly hands-off way to grow your business, franchising probably isn’t the best fit.
Affiliate Advantage: Hands-Off
With affiliates, you don’t have to do much work on their behalf, yet your business still earns a cut and sometimes a hefty one of everything they sell. In some situations, such as when your brand is strong enough, you can charge affiliates an up-front or yearly fee to carry your business name, just like you would a franchise. CrossFit is an example of a company that charges affiliates just to use the name; gym owners pay $3,000 per year to carry the name, but unlike franchisees, CrossFit affiliates receive no support or territorial rights from the company.
Affiliate Disadvantage: Less Control
When you franchise your business, you retain a lot of control over your franchisees’ actions. Franchise owners usually cannot alter logos, adjust product prices, partake in unapproved marketing activities, or make many other autonomous decisions without approval from the home office. Moreover, because franchisees invest a lot of money into the business, they have a vested interest in success. Most franchise owners run their businesses full-time as their solo careers. Affiliates, by contrast, haven’t taken on the same level of risk, which sometimes makes them less motivated to sell. Some people work as affiliates for several companies, so the time they spend actively promoting your products might be minimal. In essence, you can expect to get a lot out of each franchisee, whereas you might take on 10 or more affiliates before finding one that takes your business seriously and works at it full time. Franchising and taking on affiliates both are viable business models for growing companies. Which is right for yours depends on your goals and the level of involvement you want to have in the process. A reputable business plan consultant might be able to help you decide between the two.