Empowering Your Business Through Expert Franchise Development

3 Main Reasons Entrepreneurs Franchise

Reasons why entrepreneurs franchise their business is widely addressed in franchising literature. Typically, academia discusses 3 main theories as to why entrepreneurs choose to franchise their business:

  • Resource-Scarcity Theory (using franchisee resources)

  • Risk-Sharing Theory (sharing risks with franchisee)

  • Agency Theory (reducing management costs & conflicts).

It is likely that one or more of the 3 theories expressed below resonates with your current expansion dilemma. it is also likely that franchising would provide you a proven route to rapid growth.

Resource Scarcity Theory

Franchising serves as a strategy to overcome limitations that your business might face when trying to expand at a rate beyond what is possible only using internally generated resources; particularly access to scarce resources such as capital and managerial resources that are needed in order to rapidly expand to gain market share. By tapping into resources of independent entrepreneurs (franchisees), you accelerate your businesses' growth across a decentralized network. This strategic approach expands your business footprint, gaining market share and achieving economies of scale. It creates the ability to compete effectively against more established businesses.


These scarce resources include:

  • Limited Capital Resources

    • capital

    • manpower

    • operational resources

  • Local Market Access

Risk-Sharing Theory

Franchising is a mutually beneficial arrangement where both parties contribute and benefit from their respective expertise and resources, while distributing risks and rewards in a structured manner.

  • Risk Allocation: Expand without bearing all the financial and operational risks associated with opening new locations.


  • Financial Risk: Franchisees invest their own capital into the business, reducing the financial burden on the franchisor.


  • Operational Risk: While franchisees manage day-to-day operations, they follow a proven business model and receive support (e.g., training, marketing, supply chain) from the franchisor. This helps mitigate operational risks for both parties.


  • Reward Sharing: Successful franchises benefit both the franchisor (through royalty payments and brand expansion) and the franchisee (through profitability and the use of a recognized brand).


  • Motivation Alignment: Franchisors have an interest in supporting franchisees to ensure their success, as it directly impacts the brand's reputation and overall performance.

Agency Theory

The agency theory relationship is considered a hybrid system in which the franchisor tries to maximize the value of the chain while reducing the supervision costs to a minimum. The franchisor decides between owned or franchised units based on the supervision cost.

Supervisory costs include:

  • Management capability

  • Knowledge of the local market

  • Distances between the desired location and the central office

  • Local demographic density

  • Proximity between the current locations and planned locations

Franchisors can eliminate or reduce many supervision costs because the franchisee is necessarily stimulated to obtain the best possible results for recouping the initial investments and generate a high profit margin, which also benefits the franchisor’s results. Thus, franchising largely alleviates the franchisors’ need for costly observation of employed managers to efficiently “manage” a locations profitability on continual basis.

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