Looking to Expand Your Business? Here are 4 Franchise Alternatives You Need to Explore.

In order to understand what is to be considered when weighing the alternatives to the franchise expansion route, it makes sense to first know what precisely a franchise is.

In the U.S., the Federal Trade Commission and state regulatory agencies have developed a formal set of disclosure requirements and franchise-specific requirements and prohibitions that franchisors must follow in their relationships with their franchisees. To determine whether or not a business meets the definition of a franchise, under the Franchise Rule, the Federal Trade Commission applies three definitive criteria:

The right to the use of a trademark to distribute goods and services (which bear the franchisor’s trademark, service mark, trade name, or another commercial symbol);

The provision of significant control or assistance (by means of site requirements, required business practices, training programs, franchise operations manuals, etc.); and

The payment of fees (initial franchise fees, royalties, service fees, and the like).

The details and complexities of the FTC Rule 436 are too numerous to list here in their entirety; however, if you are planning on forming a business relationship that involves all three of these above criteria, you are, in fact, creating a franchise relationship – regardless of what you choose to call said business relationship. And you will be subject to compliance with franchise regulations.

Now, knowing that, let’s examine four alternatives to franchising a business and their relative advantages and disadvantages.

Related: 15 Strategies for Quickly Expanding Your Business

1. Company-Owned Operations

The most obvious expansion method for many companies is the development of additional company-owned outlets using internal or personally borrowed funds or capital raised through private investors.

This strategy offers several advantages over traditional franchising. For example, company-owned growth allows you to keep 100 percent of each unit’s profits rather than sharing them with franchisees. It also offers you increased control over unit management. And since you own the assets, you get increased flexibility and the ability to react faster to market changes.

Corporate expansion also represents a more predictable method of growth because you don’t need to learn the new business of franchising. And at the same time, these locations allow you to build tangible assets in the business, which can have a very positive impact on the company’s valuation when you choose to retire or exit the business.

There are some disadvantages, though. Risk is the biggest one. While you get to keep 100 percent of the profits, you are also responsible for 100 percent of the losses. And the more money you invest in corporate operations, the more you have at risk. Increased control also comes with increased responsibility. Sexual harassment, EEOC violations, ADA violations, workers’ compensation, and other worker or customer liability issues will all be directed at you.

And, of course, there is the question of whether the capital you have access to will be adequate to meet your goals. Moreover, in today’s age of the Great Resignation, finding and keeping management is challenging – whereas franchisees are likely to be both longer-term and much more highly motivated by their investment.

Related: Expanding Your Business? Ignore These Pitfalls at Your Peril

2. Business Opportunities

Some companies expand with a business opportunity or license program – sometimes something they dreamed up and sometimes the creation of their attorneys. But simply calling something a license or a business opportunity does not make it so. To avoid falling under the definition of a franchise, you will need to remove one of the definitional elements of franchising (trademark, support or control, and a fee). In the case of a license, you would remove the trademark element of the franchise definition – requiring your licensee to operate under their own brand.

The advantage to the business opportunity route is that in many cases, the licensor does not have to comply with the FTC’s franchise disclosure regulations, which saves money and makes the sales process less complex. That said, a business opportunity may still have to comply with franchise disclosure laws in some states and will need to comply with the patchwork quilt of business opportunity laws that exist in a number of states. So, while the business opportunity licensor may avoid some legal costs if a company plans to roll out the offering on a local level, a national rollout may ultimately require them to pay more in the way of legal fees and make it only marginally easier to sell.

At the same time, avoiding a common brand identity often puts you as the licensor at a long-term disadvantage. The use of a common brand and identity can benefit both the franchisor and franchisees. Even a one-unit chain looking to expand through franchising will be likely to double their advertising exposure with the sale of their first franchise, whereas the licensor who sells 100 business opportunities will get little, if any, in the way of brand recognition – because their operators will do business under their own names. And because each business opportunity will operate under their own brand, it is much more difficult to control how the licensee operates, as you do not have the same legal nexus as a franchisor would.

Related: 5 Tips for Expanding Your Small Business (The Right Way)

3. Trademark Licenses