Growth through franchising not for everyone: Adler
By Kirsten McMahon, AdvocateDaily.com Managing Editor
When looking to expand a profitable business, franchising is just one of several options, says Toronto franchise lawyer Joseph Adler, who serves as legal counsel for franchisors as well as multi-unit franchisees.
“When growing your business, there are options with varying degrees of control and different amounts of capital required,” says Adler, a partner with Hoffer Adler LLP.
He tells AdvocateDaily.com that one way of growing operations is through additional stores or corporate units.
“You may consider establishing additional company-owned outlets. This gives you the most amount of control, but it’s only available if you have the capital to do so,” Adler says, pointing to Starbucks as an example of a company that has seen rapid growth without using a franchise model.
However, he notes that not every corporate-owned model enjoys the same level of success as the international coffee chain.
“In a corporate-owned environment, the customer or client experience may vary by location. You could walk into one store and staff are busy on their phones and may not be interested in assisting you. The question is, what’s motivating them?” Adler says.
At the other end of the spectrum, he says there is the franchise model where a business is licensing its trademark, know-how, and systems to a franchisee who purchases and runs the unit.
“While there may arguably be less control in this arrangement, it is a better way if you’re looking to expand through the capital of others,” he says.
As well, Adler says the theory behind franchising is that owners are more likely to have a vested interest in performing well because they have invested their money.
He says corporate-owned units have a high degree of control because the corporation can shut down a flailing location or invest more money.
“You’re not as beholden,” Adler says, noting that control in a franchise arrangement is inserted through the franchise agreement.
Somewhere between these two models is licensing, he says.
“While every franchise has a license of a trademark, what differentiates a licensing agreement from a franchise agreement is that there’s no significant assistance or control provided by the licensor.
“A company licenses a trademark to a licensee, and
the licensee is free to operate its business as it sees fit, but there are stipulations that govern the licensee’s use of the marks,” Adler says. “If a licensee sells the goods or service in a fashion contrary to those albeit limited stipulations, then the licensor can terminate the agreement.”
Another option for expansion is through joint ventures, which involve two or more businesses joining forces.
“Like licensing, it’s a way to expand that’s somewhere in the middle of corporate-owned and franchise models,” Adler says. “But you’re giving up a certain amount of control and exposing your system to other parties.”
This is the first part of a mini-series on expanding a successful business. Stay tuned for part two where Adler will take a deep dive into expansion through franchising.