Small Business

The Pros and Cons of Franchising


By Karen E. Klein Q: I am consulting for a small but very successful privately owned restaurant chain. To date, the company has grown by opening new, wholly-owned stores with internally generated cash flow. Now, the owner wishes to accelerate the company's expansion. He has received several offers from well-heeled local business owners to franchise his restaurant in suburban areas outside the company's core metropolitan market. Currently, with the several locations he has, he is stretched for time and managerial resources, and he seems to feel that franchising will put the pressure on someone else. But from what I have read, franchising takes a significant amount of planning, infrastructure, and management attention on the part of the franchisor. Assuming that the owner is not capital constrained, is franchising necessarily simpler to execute than organic growth? -- T.N.H., New York City

A: There's a two-part answer to your great question. Franchising, most experts agree, is easier to execute than company-owned chain-store growth, especially if the business owner wants to grow very large, and do so very quickly. However, setting up the franchising operation is more difficult and time-consuming to implement, vs. opening new company-owned locations one at a time. Once your restaurant owner is over the initial hurdles of franchising -- and be warned, it can take a lot of time and money -- responsibility for the chain's growth will largely be shared with the franchise owners, making it simpler for him to expand.

"As a franchisor, you are either relieved [of a lot of expansion work] or your infrastructure requirements are certainly less for the development of each location, and the operations of those locations, over time," says Michael H. Seid, a franchise consultant with Connecticut-based Michael H. Seid & Associates.

TAKE A HARD LOOK. Once the franchise system is operating, franchisees will take the major portion of the burden off the owner when it comes to locating sites, developing those locations, hiring staff, running daily operations, and the countless other matters involved in running eateries. Also, the franchisor is relieved of the significant burden of putting up the capital to open fresh sites, since franchisees foot those bills themselves.

"Is franchising right in every situation? Absolutely not," Seid says. "The franchisor should be able to rapidly obtain critical mass in a market, for one thing. But, given the description of your current situation, this is likely a good candidate for a franchise-feasibility examination."

Remember that franchising takes planning and a good deal of expertise for the chain to get itself established and run well. You can have serious legal trouble if your operation is not set up correctly, which is why Seid recommends that you obtain the services of a qualified franchise consultant and a lawyer experienced in franchising law before you move forward. Ask first for a feasibility study, just to make sure that your client is not jumping into a costly process that truly will not work for him.

Seid's Web site features a number of informative articles on the details of franchising. You will also find resources and contacts at the International Franchise Assn., and the American Franchisee Assn.. Good luck!

Have a question about your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally. Karen E. Klein is a Los Angeles-based writer who specializes in covering covered entrepreneurship and small-business issues.


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