Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Steve Leggett, co-owner of MineralPro Manufacturing Ltd., opted for the dealer model for his business (COURTESY OF STEVE LEGGETT)
Steve Leggett, co-owner of MineralPro Manufacturing Ltd., opted for the dealer model for his business (COURTESY OF STEVE LEGGETT)

EXPANSION

Dealers or franchisees: how to choose Add to ...

When Steve Leggett wanted to expand his first business 20 years ago, the Lumbly, B.C.-based entrepreneur figured he was best off becoming a franchisor.

By franchising, he figured he would maintain full control over his company, which made underground lawn sprinklers, along with the way his product was sold, as well as charge a hefty fee and collect ongoing royalties.

More related to this story

But after two years, he ditched the franchise model and set up the business as a dealer network instead.

That worked better than he expected. He grew his business from 25 franchisees in his first two years of operation to 320 dealerships four years later.

“It took off hot and strong,” he says.

Two decades later, the serial entrepreneur is back with yet another business, MineralPro Manufacturing Ltd., which sells home-based water-filtration systems.

Mr. Leggett, who co-owns MineralPro with his son, Curt, didn’t even bother to look at franchising when he started the company in 2007, but is using the dealer model again.

“It’s a quick and easy way to launch products,” says Mr. Leggett, who has also had a couple of other businesses in between, including one abroad, none of which lent themselves to either the dealer or franchise models.

Dealerships aren’t a new concept – auto companies have sold products through this type of arrangement for decades – but the model often takes a back seat to franchising, a more popular way of expanding a business, says Rob Warren, executive director for entrepreneurship at the University of Manitoba’s Asper School of Business.

Business owners who use dealer networks to sell their products often go that route because it’s cheaper and less time consuming than setting up a franchise system, Mr. Warren says.

He says the cost to create a dealer network can be negligible – all you have to do is convince people to sell your product – while franchises can cost “thousands to millions” to set up, depending on the company.

It takes a lot less effort to set up a dealer network, too. For a small fee – $3,500 in Mr. Leggett’s case – manufacturers give dealers the exclusive right to sell a product in their area. The dealer also gets signage, marketing material and training manuals. The person making the products sells his or her goods to the dealer above cost. The more a dealer buys, the more profit someone like Mr. Leggett makes.

It does take work to connect with dealers – you often have to find a person in a specific area that will sell your product for you – but the search isn’t as demanding as it is for franchisors, who often have to find specific locations for a new store and need competent people who can run an entire operation on their behalf, Mr. Warren says.

Because entrepreneurs don’t have to shell out as much money to get their product into stores, it’s often easer to expand, Mr. Leggett adds.

However, because dealers are independent, Mr. Leggett says he can’t demand they sell his product in a specific way. The store owners he deals with have other products on display; they may have a different sales pitch – or price – than what Mr. Leggett suggests.

Some may even lose interest in the product altogether. “A dealer might promote it, or just dabble in it or do nothing,” Mr. Leggett says.

“It’s a riskier model,” Mr. Warren notes. “You hope your dealer is drawing people into the stores and getting them away from the chains.”

This uncertainty is one factor that prompts some people to opt for franchises instead. That’s virtually business in a box – every last detail, from décor and pricing to which manufacturers franchisees buy items from, is dictated by the franchisor. That helps people retain control over their product, and there’s less room for error, Mr. Warren says.

It may also be easier to make money with a franchise, especially if your company has a big brand name.

However, that big brand costs big money – franchisees have to shell out just under $500,000 to own a Tim Hortons franchise, for instance.

Those who choose to go the dealer route must also make sure they don’t operate like a franchise or risk violating franchise law, warns Blair Rebane, head of the franchise and distribution group at Vancouver-based law firm Borden Ladner Gervais LLP.

Franchising may continue to get more attention from entrepreneurs, Mr. Warren says, but the dealer method may make more sense for some businesses.

It’s worked for Mr. Leggett.

He has learned some from past mistakes: Instead of selling his products through just anyone, as he did with the sprinkler business, this time around he’s more carefully choosing dealers. In four years, he’s teamed up with 19, including one in the United States and another in the Caribbean as he aims to expand internationally.

“The dealership model is just a faster way to grow,” he says. “There’s less cost and it’s less of a burden.”

WHICH WAY TO GO?

Deciding whether to expand via a dealer network or franchise model depends on a number of factors. Here are few things to consider before making a decision:

Do you want control?

Franchisors want to dictate every aspect of their business, right down to the font on the nametag. “You’re selling someone a business in a box,” says Rob Warren, executive director for entrepreneurship at the University of Manitoba's Asper School of Business.

Control is a good thing if you have a proven business model that’s easy to replicate. Dealers have almost no control over how their product is sold.

Legal issues

If dealing with pricey lawyers and reading pages of documents gives you a headache, consider a dealer model. Franchisors have to pay a legal expert to create complicated disclosure documents – it could cost up to $10,000 and run hundreds of pages long.

Dealers do have licensing agreements, but they’re usually simpler and less costly to produce.

Growth prospects

It’s easier to get your product into more stores via a dealer network. Dealers already have stores and a viable business, they just want product to sell. Franchisors have to spend time training franchisees, and, if the business requires a building, finding the right real estate to set up in.

Keep in mind, though, that dealers can drop your product whenever they please. Franchisees don’t have the same leeway.

Special to The Globe and Mail

Join The Globe’s Small Business LinkedIn group to network with other entrepreneurs and to discuss topical issues: http://linkd.in/jWWdzT

 

Topics:

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories