One way to improve and accelerate economic growth is to provide a regulatory and tax environment that encourages investment. Eliminating “red tape” and providing incentives that stimulate growth are some positive steps. Given these assumptions, what is the fastest and most likely strategy to succeed in achieving the economic growth objective?
It helps if we look at how businesses are started, and aim our strategies at the model most likely to lead to success.
To develop the business one essentially has three choices: start from scratch, acquire an established business, or buy a franchise. Many have capitalized on the franchise option to grow. Statistics have demonstrated that buying into an established brand through franchising provides a four-times-greater chance for success than starting from scratch, and is actually two times more successful than outright acquiring a business.
Franchising as a business development strategy is said to have originated in the 18th century when English and German tavern owners and brewers sought to expand. The real surge in franchising as we know it today took place throughout the 20th century and was launched with the franchising of the A&W Restaurants in the 1920s. Today, franchising remains the dominant and preferred method of rapidly growing a business.
There are many reasons for the preference of franchising as a business development strategy. Franchising provides a faster way to enter the market, and a quicker method to gain market share. Franchising also provides access to the power of advertising, instant brand awareness (awareness equates to sales), and a unique way to expand on a global basis. With respect to the latter, franchising allows for a concept to be exported while capitalizing on a local market partner (franchisee) who already has a working knowledge of that market.
Moreover, franchising is a mutually beneficial financial partnership between a large organization and an independent entrepreneur. In essence, the franchiser sells the right to conduct business using the organization’s name, trademarks, products/services, business procedures, marketing and advertising, and everything else to the franchisee. An astounding 90 percent-plus of franchises opened in the last five years remain open.
Success is attributed to three elements: an established identity and exclusive trade name; a finely tuned and proven business format; and a long-term financial relationship between the franchiser and franchisee.
As previously indicated, the growth for many business concepts has come through deploying franchising as a major development strategy. Franchising provides business opportunities at many different price points for the independent business person or entrepreneur. For example, entry into some franchise businesses might involve an initial franchise fee as low as $5,000 to as high as $1 million and a small percent of revenue. Most franchises require ongoing royalty fees, which is the amount charged by a franchiser for the ongoing use of the brand name and support. Royalty fees usually are expressed as a percent of sales. The franchisee also has the cost of the facility and operations to bear. Franchisers may provide technical assistance related to construction and training. Some charge separate fees and others provide the advice gratis.
Let’s get back to creating a favorable environment for franchising. Think of how incentives and assistance could be provided to existing small businesses to expand through franchising and what this would mean to the Maine economy. Add to this the creation of a favorable environment for franchising and Maine’s economy could boom.
Franchising provides a quick start with a name brand for the business. It likewise provides an ongoing source of revenue for the franchiser through the various fees and royalties. Franchising is a win-win-win scenario. Individual entrepreneurs win with a greater chance of success. Maine residents win with new services and jobs coming to their communities. And, the state economy wins with incremental sales tax revenues.
Franchising remains the single greatest business development strategy and perhaps fastest growth strategy for the Maine economy.
Ronald A. Nykiel, dean of the College of Business at Husson University, is a member of the National Association of Corporate Directors, has authored a number of books on management and marketing, counseled the President’s Commission on Executive Interchange and chaired a governor’s revenue forecasting commission.