For the Franchisor

Some entrepreneurs may begin their business with the intent of franchising their operations; other businesses may elect to franchise an existing business because it has been so successful. For franchisors, franchising is a means of equity financing in which the franchisor "sells off" expansion rights in the business. In return, the franchisor typically receives an initial franchise fee, service fees, equipment sale or lease fees, and royalties.

Financing Expansion: The advantage of this form of financing is that the franchisor passes on much of the cost of expansion to the franchisee, thereby permitting much faster growth in a wider geographic market. This is particularly true when the startup costs of a new facility entail high capital expenditures.

The Downside: Disadvantages of franchising are the unique development and overhead costs associated with franchising, the heightened legal risks from vicarious liability for the acts of franchisee operations, increased regulatory costs, and a dilution of ownership.

If you think that your business is a good prototype for similar businesses in other locations, we recommend that you establish at least a couple of other sites yourself. If the expansion is successful for at least a year, talk to a good franchise attorney about testing the waters by selling one or two franchises. Contrary to popular opinion, slow and steady growth is the best route to success in franchising.