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80% of
franchises survive their first five
years,
while
33% of
independent businesses fail |
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Franchise Versus Company Stores |
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Companies with a successful business model face the challenge of how to grow. Fifty years ago this was accomplished through slow managed company owned expansion, that was funded through internal profits and willing banks. Banks used to lend five times the companies net worth, which has now been reduced to one to two times net worth. While lower interest rates reduce the costs of the loan, they also have made the banks more selective on who they loan. Venture capital and the stock market are alternate sources of capital, but they come at a high price, giving up stock and a share of control. |
| Today things are different. Company owned independents play less of a role, as retail channels are controlled by chains and franchises. Independents can not compete against rapidly expanding, nationally recognized and media focused chains. The chains market position rapidly grows, while the independents position dwindles. Franchising has thus become the preferred method of growth for those seeking planned expansion. |
| Franchising addresses three key areas that hinder company growth: |
- Money. Cost of expansion is shifted to the franchisees who bear the costs of facilities, purchasing inventory, managing employees and providing the working capital. Often for the costs of setting up one company owned store, the franchise can be launched.
- Time. Competition is quick to move on market opportunities, and franchising provides a vehicle for getting to market quickly to establish your brand.
- People. Franchisees typically outperform “hired managers” because they own the business and have a vested stake in its success. Franchisees have a pride of ownership and are driven to perform and show the business in the best light. And there are no problems with hiring and firing managers.
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