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A to Z of Franchise Business Model

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Franchise Business Model

Being your own boss can be exciting. You enjoy the freedom and flexibility of implementing your decisions and turning your dream into reality.

However, the process of launching a business is not easy. You need sufficient capital, skilled and experienced team, a unique product and more. Therefore, starting a business from scratch can be daunting.

Businesses on the other hand are looking for a way to expand. One of the best ways of growing their client base and providing products and services both locally and internationally is through franchising.

So then here is A to Z of the franchise business model.

What is Franchising?

The business franchise model or franchising is a contractual relationship. In this business model, an established brand (franchisor) permits an independent business owner (franchisee) to use its procedures, technical know-how, brand name, reputation, branding and intellectual property. In exchange for this, the franchisee pays a certain fee and follows rules and regulations stipulated in the agreement.

In similar terms, franchising is sharing of the brand between two businesses. So irrespective of where the customer visits, the product or service is the same.

The franchising business model has revolutionized the world of business since 1731. It has actually created economically sustainable businesses both locally and internationally.

The power of franchising is that independent companies share a brand and as a result, they have witnessed tremendous growth and created wealth.

The following are the common franchise arrangements:

Business Format Franchise: This is a popular franchise arrangement where the franchisor allows the franchisee to use its business model and trademarks to do business in exchange for a one-time fee and ongoing percentage of sales revenue. Also, the franchisees adhere to the parent company’s rules and guidelines

Product Franchise: The oldest franchise arrangement where the franchisees exclusively sell or distribute the parent company’s products.

Manufacturing Franchise: The franchisee has the exclusive right to manufactures the parent company’s products as well as distribute them using its trade name and trademark.

The A to Z of Franchising

Area Franchisee: This is a third party business (franchisee) with exclusive rights to operate in a defined territory. That means the franchisee operates their franchise for a specified period as indicated in the agreement.

Breakeven: Refers to the period that the franchise business begins to generate revenue that is equivalent to the investment. At the breakeven point, both the net profit and net loss gets cancels out.

Company-Owned Units/Locations: The number of units that the parent company but not what franchises own.

Disclosure Document:  A detailed document that has the all necessary information about the franchise.

Evaluation: Prospective franchisees should evaluate whether the franchise concept before signing the deal. The entrepreneur should confirm whether the concept is what they are looking for or not and this has to be done within the disclosure period.

Franchise Fee: Refers to the initial investment that the franchisee makes to the franchisor for using their brand’s name and likeness. The franchise fee is a one-time payment.

Growth: The franchise’s growth rate is one of the key factors that an entrepreneur considers before signing a deal with the franchisor. This element reveals any potential risk factors in this type of business model.

Hand-holding: Franchisors provides guidance and support to franchisees starting from setting up their business to operations to marketing. In other words, franchisees receive training on how to manage their business.

Invariability/Uniformity: Franchisors are keen on maintaining uniformity and consistency across the entire franchise network.

Joint Venture Partnership: In a joint venture partnership, two companies sign an agreement to work together, share costs, rewards and risks. In other words, they work together for mutual profit.

Kiosk: A small portable carts ideal for entrepreneurs interested in franchising but due to capital constraints they can’t.  It is also common in the food-related franchise where an entrepreneur can choose a food cart or food truck.

Location: Finding an ideal location when starting a franchise business is vital because establishing an office in the wrong territory can be a costly mistake.

Master Franchise: A franchise deal where the franchisor allows the franchisee to manage all franchising activities in a particular territory is known as a master franchise.

Net Worth: Refers to someone’s total value or assets. The majority of franchisors have eligibility criteria that require the prospective franchisee to have a minimum net worth and minimum liquid capital.

Opening: Both franchisor and franchisee work for a common goal and so they play a vital role during the opening of this new business.

Payment: Aside from the initial franchise fees, the buyer has to make one-off or ongoing payments to the franchisor. Royalty is the percentage of earned revenue that the franchisee pays to the franchisor regularly.

Question: Asking questions before signing the franchise agreement can help you find the best franchise opportunity matching your needs and goals.

Relationship: The franchise system is built on the relationship between the franchisor and franchisee. Nurturing a cordial relationship will take your franchise business to another level.

Supplier: This is a business person that supplies franchisees with products or services. The entire franchise system is built around the franchisor’s trademark and brand.

Uniqueness: A unique franchise attracts prospective investors and franchises. It reveals to the public that the brand has a specific niche of customers and its products and services are matchless.

Validation: It’s recommended that prospective franchisees should get in touch with existing ones to validate the potential of the franchise opportunity. It’s part of due diligence and the majority of entrepreneurs use it before signing the deal.

Wealth: A profitable franchise opportunity is one with a track record of net wealth. Prospective franchisees shy off from franchises without some level of profitability.

Young Franchisees: In today’s competitive business world, younger franchisees bring in creativity, innovation, energy and persistence. These qualities make younger franchisees successful because they are able to effectively target customers with unique products and services.

Zero Royalty: It’s a type of agreement where the franchisors don’t charge their franchisee any royalty fee. Instead, the franchisor earns revenue from the sale that franchisees make.

FAQs

What are the Advantages of Choosing the Franchise Business Model?

Many franchisees consider ongoing support and guidance as the top benefit of the franchising business model. However, there are other advantages linked to franchisee businesses. They include:

  • Franchising allows you to start from an already established brand name instead of building your own from scratch.
  • Signing an agreement with a strong brand exposes you to a broad customer base, inspire customer loyalty, increased sales and so your business will have a competitive edge.
  • The rate of business failure when you work with a top franchisor is minimal as opposed to working alone. The franchisor will hold your hand which is the help you need as a new entrepreneur.
  • Franchisors have existing suppliers offering high-quality raw materials and better deals. So a new franchisee is just added to this existing relationship which helps the entire franchise chain to deliver uniform products.
  • The franchisor manages the ad campaigns and promotions so you shouldn’t worry about marketing and advertising your business. Also, the parent company conducts market research about the potential locations and shares the findings with its franchisee to help those interested in operating multiple chains proceed with ease.
  • A franchising opportunity offers lower operating costs and quality leadership. It does this through training and assistance such as in identifying appropriate strategies that you can use to improve your business operations while keeping your costs low.

How Does a Franchisor Benefit from Franchising?

Brands have reasons why they choose to adopt the franchise model rather than establishing their own branches across the country or states. The following is what franchisors get when they apply the franchising model.

Access to New or Desirable Locations and Markets: A brand spreads out to new territories that it wouldn’t have thought about or gained access to through expansion. So, the franchisor spends on market research while the franchisees establish businesses in those desirable locations. The amount spent on market research is lower than what entrepreneurs use to set up a franchise.

Additional Revenue: Aside from the initial franchise fee, the franchisor continually gets royalties based on their agreement with the franchisee. It might be an on-time royalty or ongoing royalties. This can be a huge revenue when the brand has a chain of franchises.

Additional Brand Awareness: Franchisees advertise the parent company when they open offices in new territories. Therefore franchising helps a brand to enjoy expanded advertising power of their

Is the Franchising Process Standard Across the Industries?

No. The franchising process is different even within the same industry. It depends on the state, the type of franchise arrangement and franchisor guidelines.

Here is how a typical franchising process looks like.

·         Do Your Research

Begin by identifying your industry of choice. Next, choose the type of franchise you would want to venture into and what you intend to gain from it.

List the number of franchisors operating in this industry and check the ones you’re interested in investing in. You should prioritize them based on your goals, business acumen and budget.

Research on the legal consideration for your industry of choice and for starting a franchise business in your state or city.

·         Contact the Franchisor

Reach out to the preferred franchisor or their representative. You will gather a lot of information during the face-to-face meeting which is vital when making the final decision.

Ask questions such as how long the company has been in operation, risk factors, growth plan and market share.

Ask the representative to give you any relevant initial documentation that they avail to potential franchisees. This can be franchising guidelines, requirements and brochures.

·         Negotiations

After listing potential franchisors and contacting them, the next step is to negotiate the terms of partnership with the best one on your list.  Having the best negotiation strategies and skills will help you get a better deal.

·         Sign the Agreement

Signing a formal agreement is the last step after accepting the terms on the table. It’s recommended to hire a legal expert at this stage in order to help you understand the terms of the agreement thus avoid potential disputes in the future.

I'm a passionate full-time blogger. I love writing about startups, how they can access key resources, avoid legal mistakes, respond to questions from angel investors as well as the reality check for startups. Continue reading my articles for more insight.

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