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The Franchise Business Model: Everything You Need to Know
You may be wondering what to make of franchising and whether it's something you should pursue. But if you don't have a solid indication of what franchising is, even the basic concept can be overwhelming. Here's a guide to everything you need to know about franchising.
What Is Franchising?
Franchising, or a business franchise model, is a contractual business model or relationship whereby an established brand, known as the 'franchisor,' allows an independent business owner, or franchisee, to use its branding, business model, and other intellectual property. In return, the franchisee agrees to pay an upfront franchise fee, plus ongoing royalties to the franchisor.
There are dozens of different types of franchise arrangements, but three of them are the most common. They include:
- Business format franchise : This is the most common type of franchise arrangement. In this model, the franchisor allows a third party to do business using their trademarks and business model in exchange for fees and a recurring percentage of sales revenue. Franchisees under this model are run according to the parent company's guidelines and rules.
- Product franchise : This is the oldest form of a franchise arrangement. Under this model, the franchisees exclusively distribute or sell franchisor's products.
- Manufacturing franchise : Within this model, third-party manufacturers obtain exclusive rights to produce and distribute products using the franchisor's trade name and trademark.
Advantages of Franchising For Entrepreneurs
Ongoing support from the franchisor is not the only benefit of franchising. Here are a few benefits associated with franchise businesses:
- You'll work with an already established brand name: A strong brand will inspire customer loyalty, lead to more sales opportunities, and lend a competitive edge to your business.
- Reduced risk: If you work with a top franchisor, the risk of your business failing is very low compared to starting a business of your own.
- Simplified procurement processes: Another added advantage of franchising is you'll get access to quality suppliers and better deals.
- You don't have to worry about advertising or marketing: Your business will benefit from ad campaigns and promotions managed by the franchisor. The franchisor will also conduct market research on the best potential locations and share the findings with you.
- Quality leadership and lower operating costs: The franchisor will train you and help you identify the best strategies to manage your business operations effectively while keeping your costs low.
What Does the Franchisor Get Out of This Arrangement?
On the opposite end, there are a variety of incentives for businesses to adopt the franchise model. Here are some benefits of franchising for the franchisor:
- New locations and desirable market: Franchising is a source of capitalized expansion to new and desirable locations. Rather than franchisors putting their own money into market research, franchisees invest their funds to establish a business in a desirable location.
- Additional revenue: Franchisors benefit from ongoing royalties.
- Additional advertising: Franchisors also benefit from expanded advertising power through franchisees.
How Does the Franchising Process Work?
The franchising process varies depending on the type of franchise arrangement, state, and franchisor guidelines. That said, a typical franchising process will look something like this:
Step 1: Gather background information
First things first, conduct research to identify the type of franchise you would like to venture into. Make sure you have a clear idea of what you expect to gain from starting a franchise. Next, come up with a list of franchisors you'd be interested in investing in. Prioritize selecting businesses that match your goals, budget, and business acumen. Also, make sure you research the legal considerations involved with a particular industry or jurisdiction for starting a franchise in your state.
Step 2: Reach out to the franchisor
Contact the franchisor's representative and schedule a meeting. A face-to-face meeting is an opportunity for you to know more about the business and help you make an informed decision. Key questions to consider include inquiring about how long the business has been in operation, its growth plan, and risk factors. After the interview, the franchisor should offer you their franchising brochures, guidelines, and other relevant initial documentation for potential franchisees.
Step 3: Negotiations
Assuming initial conversations go well and the franchisor meets your key criteria, it's time to negotiate the terms of the partnership. This stage is often quite complicated, so you need to equip yourself with the best negotiation skills and strategies. Tulane SoPA can help sharpen your negotiation skills and understand business fundamentals via our Applied Business Studies program .
Step 4: Agreement Signing
Once the terms on the table are accepted, the next step forward is signing a formal agreement. At this stage, consider hiring a legal expert to guide you. Also, take some time to review the agreement to ensure that it's as clear and detailed as possible to avoid confusion and potential disputes down the road.
Franchise Regulations
The franchise disclosure document, or FDD, forms the legal foundation to sell a franchise. It is a fundamental requirement for both the federal and state franchising laws. The FDD requires a franchisor to provide all franchise disclosure documents with their respective state regulators. Also, under the FDD, franchisors can renew their agreement with their franchisees at the end of an agreement in accordance with (Sec. 8) Small Business Franchise Act.
Prepare to Become a Leader in the Business Sector with Tulane SoPA
To run a successful franchise, you'll need to equip yourself with the right business management skills that will mold you into an effective entrepreneur. Tulane School of Professional Advancement's Applied Business Studies courses can help you start your journey to building your future as a business owner. Request more information about our program today to learn how we can help you pave the way to a new career with our flexible online degree programs.
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The Franchise Business Model 101 – Introduction and How Does It Work
The franchise business model is not new. In fact, franchising is an ancient distribution model that dates back to the middle ages and ancient China. “In the middle ages, the local titled landowner would grant rights to the peasants or serfs, probably for a consideration, to hunt, hold markets or fairs or otherwise conduct business on his domain. With the rights came rules and these rules became part of European Common Law, explained FranChoice .
Modern-day franchising is believed to have started with Benjamin Franklin, who in 1731 entered into the first franchise agreement with Thomas Whitmarsh to provide printing services in Charlestown, South Carolina. In the early 1850s, Isaac M. Singer again looked to the franchising model to distribute the Singer sewing machines. But, it would be another century after Singer before franchising would become truly popular, thanks to Ray Kroc and his discovery of the McDonalds hamburger stand.
Today, there are thousands of franchises across hundreds of industries and sectors. As of 2018, the franchise industry employed 21 million people and generated $2.3 trillion of economic activity, according to a U.S. government report.
Franchising has contributed greatly to the overall US economy and has proven to be a lucrative avenue for those who seek both freedom and financial stability. But what exactly is a franchise? Are there different types of franchise models? How does it all work? And is owning a franchise right for you?
What is a Franchise? Understanding the Franchise Business Model and How Does It Work
A franchise is a type of business that is operated by an individual(s) known as a franchisee using the trademark, branding and business model of a franchisor. In this business model, there is a legal and commercial relationship between the owner of the company (the franchisor) and the individual (the franchisee). In other words, the franchisee is licensed to use the franchisor’s trade name and operating systems.
In exchange for the rights to use the franchisor’s business model — to sell the product or service and be provided with training, support and operational instructions — the franchisee pays a franchisee fee (known as a royalty) to the franchisor. The franchisee must also sign a contract (franchise agreement) agreeing to operate in accordance with the terms specified in the contract.
A franchise essentially acts as an individual branch of the franchise company.
Should You Buy a Franchise or Start a Business From Scratch?
The Franchisor and Franchisee Relationship
The Franchisor is the parent company that sells the rights to franchise their brand to prospective franchisees. The franchisor is the one who has developed the company, brand and operating systems. Upon the decision to franchise their business, the franchisor offers franchisees the rights to their proven business model, recognizable trademark, established business systems, and their training and support.
The Franchisee is the individual who buys the rights to sell the products or services and utilize the proven and established business systems mentioned above. Although the franchisee is, in essence, buying a pre-established business, franchisees must work hard in order to gain loyalty in their market, attract talent and grow their franchise business. After all, it is the franchisee that runs the day to day business.
The franchisor/franchisee relationship should be one built upon mutual respect, understanding, and support. Of course, as with all relationships, no two are the same. Although relationships between franchisee and franchisor will differ from brand to brand, one thing always remains the same: the franchisee/franchisor relationship matters.
What Franchisees Can Expect from Their Franchisor
When a franchisee is serious about a franchise opportunity, the franchisor will share their Franchise Disclosure Document (FDD) , which holds imperative information about bankruptcies, various fees, franchisee obligations, and more.
Financing Options
For interested and serious buyers, some franchisors offer financing programs that can assist franchisees in finding a loan servicer or alternative methods of payment.
Location Assistance
If the franchise requires a physical location, usually, the franchisor will assist in site selection as well as finding a local contractor to construct the approved architecture.
Training and Operational Guidance
Franchisors also provide franchisees with an operating manual and in-person or online training to understand how the business runs. The operating manual includes all of the roles of employees, performance standards, management operations, and other specifications. The training tends to take place either at the franchisor’s corporate headquarters or a combination of online training and in-person training.
Marketing and Advertising
Franchisors also supply their franchisees with marketing and advertising. This could be through television and radio ads or through social media and email campaigns. Franchisees are usually charged a marketing fee to cover this cost. Some franchisors also lend administrative services for their franchisees, like human resources and accounting services.
As a franchisee gets their business up and running there are bound to be questions and concerns that arise. The franchisor will provide varying levels of support throughout the life of the franchise agreement. Not to mention, franchisee also have access to an entire network of fellow franchisees, who may be able to offer advice or offer you a solution to a common problem.
The Pros and Cons of Franchising: Is it Right for You?
Types of Franchising – Two Primary Franchise Business Models
There are two primary franchise business models that exist today: The Product Distribution Franchise Model and The Business Format Franchise Model.
Product Distribution Franchise – In the product distribution franchise model the franchisor manufacturers the product and the franchisee sells the product. This relationship is similar to the supplier-dealer relationship with a few differences. One major difference is that in the franchise relationship the franchisee may distribute the products on an exclusive or semi-exclusive basis whereas a supplier-dealer relationship may allow the dealer to sell several different brands at once. Examples of product distribution franchises include Coca-Cola, John Deere, and Ford Motor Company.
Business Format Franchise – The Business Format Franchise is the most common franchise model. In this model, the franchise is allowed to use the brand and trade name of the franchisor, like in the product distribution model, but they are also granted access to the product distribution model. Most of the franchises that immediately comet o mind, like Wendy’s, Dunkin Donuts, or McDonald’s are business format franchises.
Different Types of Franchise Ownership
Single Unit Franchisee – When a franchisee purchases their first franchise they are considered a single-unit franchisee. This is the most common form of franchise ownership.
Multi-Unit Franchisee – If a franchisee finds success with their first franchise venture they may choose to open up a second, third or even fourth franchise from the same franchisor. When a franchisee owns more than one franchise unit they are considered to be a multi-unit owner.
Multi-Unit Area Developers – Multi-unit area developers are similar to multi-unit franchisees except that they agree, up front, to develop a certain number of franchise locations within a specified time period and area. This approach is best for franchisees who are looking for market exclusivity and have the resources to secure that exclusivity with the franchisor.
Master Franchisee – A master franchisee is very similar to a multi-unit area developer in that they are obligated to open a certain number of locations in a specified time period and area. The difference is that the master franchisee is also able, and sometimes obligated, to sell franchises to other prospective franchisees. The master franchisee then acts as a middleman for the franchisee and the franchise company.
Licensing vs. Franchising
One common area of confusion for prospective franchisees is understanding the difference between franchising and licensing.
Licensing is a broad term that businesses use for contracting purposes. Licensing gives the licensee a right to operate in cooperation with a brand, gaining access to the brand’s intellectual property, brand, design, and business programs. In exchange, the licensee pays royalty fees to the licensor. The licensor may have a say in how the intellectual property is used but not how the licensee operates their business. A licensor will grant a licensee the right to use their intellectual property but the licensor will not provide support or training or exert any control over how the licensee uses that intellectual property.
A franchise, on the other hand, is a legal and commercial relationship between the owner of a company (the franchisor) and an individual (the franchisee) who is starting a branch of that business using the business’ trademark logos and business model. Essentially, a franchise is an independent branch of the franchise company. The franchisee sells the product or service that the franchisor supplies.
What’s the Difference Between Licensing and Franchising? Learn More!
Franchise Opportunity vs. Business Opportunity
Another common area of confusion is franchise opportunity versus business opportunity. While at first glance they may sound very similar, there are some major differences. For instance, a franchise opportunity includes the licensing of trademark rights, offers robust training and operational assistance throughout the life of the contract, and can often cost more than a business opportunity due to the ongoing required fees.
While all business opportunities are different and can be hard to define, the main difference is that typically when someone pursues a business opportunity they are unlikely to receive the same level of support, training or guidance that a franchisee receives from their franchisor.
43 Common Franchise Terms You Need to Know!
Not All Franchises are Created Equal
There are thousands of franchise opportunities for eager entrepreneurs who see the appeal in the franchising model. However, not all franchises are smart investments. That’s why it’s important for prospective franchisees to research the opportunities they are interested in.
To help prospective buyers find the best opportunities, each year, Franchise Business Review surveys thousands of franchisees across hundreds of brands. Based on this research we are able to determine the best franchise opportunities on the market today based 100% on franchisee satisfaction. Details on this year’s top-rated franchise brands can be found on our Top 200 list.
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What Is A Franchising Business Model?
Franchising is a business model where the owner (franchisor) of a product, service, or method utilizes the distribution services of an affiliated dealer (franchisee). Usually, the franchisee pays a royalty to the franchisor to be using the brand, process, and product. And the franchisor instead supports the franchisee in starting up the activity and providing a set of services as part of the franchising agreement. Franchising models can be heavy-franchised, heavy-chained, or hybrid (franchained).
A business model or a growth strategy?
As the story goes McDonald’s started to use a franchising model to grow its restaurant business, and it became over the 1960s a giant in the restaurant business (or real estate depending on the perspective).
McDonald’s leveraged the existing “ Speedy Service System ” developed by the McDonald’s brothers (what we would later call “fast food”) which was an incredible process development able to provide an improved product at a faster pace.
The speedy system itself represented the application of the manufacturing process to the restaurant business. Later another important building block was added.
The franchising model really became widely applied during the 1920s and 1930s in the restaurant business.
As new physical communication networks (in the US, the Interstate Highway System) enabled people to move long distances with their cars.
Later on, Ray Kroc would apply, in its most aggressive form, the franchising model (different formats already existed centuries before) to McDonald’s existing operation to create one of the most scalable restaurant businesses in the world.
But is franchising a business model, a revenue model, or a growth (expansion) strategy ?
Well, franchising alone is just a distribution /growth/expansion strategy .
Yet, franchising combined with a product delivered differently (the “speedy system”) made up a whole new experience that made it a new business model: the heavily franchised McDonald’s business model.
Therefore, as we’ll see throughout this research, franchising here is considered a business model, as it embraces product, distribution , and growth as a whole.
Understanding franchising
Modern franchising, as conceived in today’s business world, came as a bio-product of the incredible expansion of the restaurant chains business across the US, like the automobile and the infrastructure of highways built around it, also enabling people to travel distances to go to their favorite restaurants.
From there, especially after the 1950s, franchising was used as a great way for restaurants to expand their operations across the country.
This model today, while it has become a standard, it’s all but a unified model.
In fact, as we’ll see, several companies mastered it and tweaked it to make it in line with their business philosophy, growth model, and strategy .
When a business is looking for a cost-effective means of increasing market share or geographical reach, it may opt to franchise its product and brand name.
Franchising is essentially a joint venture between a franchisor and a franchisee.
The franchisor is the original business that sells the rights to its name, idea, brand, or systems.
The franchisee then buys these rights, which allows it to sell the franchisor’s goods and services under an existing trademark and business model.
The franchise business model itself is an attractive proposition for franchisees, particularly those wanting to leverage the brand equity of a franchisor in a highly competitive market.
Franchising is thought to have originated in the United States, with the model first implemented by the Singer sewing machine company in the mid-19 th century.
Today, some of the world’s leading fast-food restaurant companies utilize the franchise model.
These include McDonald’s, Dairy Queen, Taco Bell, Dunkin’ Donuts, and Jimmy John’s Gourmet Sandwiches.
In the United States alone, the franchising industry employs approximately 8.67 million people across more than 785,000 establishments .
Some of the key points to take into account when it comes to franchising:
Franchising can work for sure as a growth propeller as you can easily increment the speed of opening up new locations by also reducing initial capital requirements, operational costs, and time to market.
While franchising is a great model to speed up operations and test new markets. It also comes with the loss of control over products, brands and standards when executed too fast.
As we’ll see throughout this research, different franchising models have come up over the years to make up for the loss of control over speed (like McDonald’s land operations trying in franchisees and making them accountable for the company’s best practices).
The speed of execution is definitely one of the key advantages of the franchising model.
And as the market widens up or shrinks, a franchising model can help the company adapt fast, as locations can be open or closed according to market trends.
Product development
While franchising is a great model for increasing the growth of the business. It might also come at the expense of product development.
Imagine the case of a company only running franchised stores that loses the understanding of the customer.
Instead, as we’ll see, franchising models have adapted also to leave a small percentage of owned stores, where the franchising company can experiment and test new product lines.
Also, here, franchising can make or break a whole brand.
And this all depends on whether the company has been able to balance out the speed and ability of the franchisees to stick with the company’s standards and be true to the company’s mission.
How franchising agreements work
Like any agreement between two parties, successful franchising depends on both companies demonstrating professional competence and acting in good faith.
To some extent, this can be facilitated by:
A code of conduct
Which sets out how each party must act toward the other.
Most codes outline disclosure requirements, a good faith obligation, a predetermined cooling-off period, dispute resolution mechanisms, and procedures for ending the agreement.
Legislation
In addition to the code of conduct, franchise parties are also required to act in accordance with laws and regulations.
In general terms, franchising agreements must operate within the bounds of fair work legislation, relevant tax laws, state licensing schemes, and anti-competitive conduct guidelines.
As we’ll see, franchising agreements will take different shapes according to the company’s franchising model.
The three main types of franchising
Within the franchising model itself are three different types:
- 1 – Traditional franchising
In traditional franchising, the franchisee sells products manufactured by the franchisor.
This arrangement appears at first glance to be rather similar to a supplier-dealer relationship. However, this is not the case.
The traditional franchise is more closely associated with the franchisor’s brand and generally receives more services than a dealer would from its supplier.
For example, The Coca-Cola Company manufactures and bottles soft drinks before selling them to franchisees.
The Ford Motor Company offers regular maintenance and servicing for Ford vehicles bought at franchise dealerships.
- 2 – Business-format franchising
The franchisee under this second model receives a complete system for delivering the product or service of the franchisor.
The role of the franchisor is to define the business system and establish the brand standards, while the role of the franchisee is to manage its day-to-day activities within those systems and standards.
Domino’s doesn’t franchise pizza any more than McDonald’s franchises hamburgers.
Both companies use business-format franchising to streamline the systems for delivering their branded products and services amongst franchisees.
- 3 – Social franchising
Social franchising is the newest franchising type and is the application of business-format franchising techniques in the delivery of products and services to disadvantaged people.
Companies that engage in social franchising provide basic items such as drinking water, pharmaceutical drugs, and other items related to healthcare, education, sanitation, and energy.
The franchising arrangement itself is often with a not-for-profit organization, religious institution, or government body.
Other types of franchising based on the FourWeekMBA research
Beyond the classic configuration and categorization of franchising business models, the FourWeekMBA research identified three main types of franchising models, mainly swinging between a model where most restaurants are owned (skewed toward a chain model) or a model where most restaurants are franchised or a hybrid model.
- Heavy-franchised business model
McDonald’s follows what can be defined as a heavy-franchised business model .
Many have argued over the years that McDonald’s is more of a real estate company than a restaurant company.
Why is it the case?
While McDonald’s does use a heavy-franchise model, where most restaurants are franchised (McDonald’s keeps a low ratio of chain restaurants where it can also do product development and discovery, which then gets extended to its franchised restaurants), there is a twist.
McDonald’s secures the land or the rental contract of the land; therefore, the franchisee, even if an “independent restaurateur,” is locked into McDonald’s growth plan.
Indeed, one of the risks of a franchising strategy is the loss of standards, especially related to product quality.
To prevent that, McDonald’s controls the land, thus making sure that the franchisee is aligned with the product’s standards.
In addition, starting a McDonald’s franchising operation might be quite expensive, and it might require substantial experience.
Therefore, this works as friction at the onset, which should motivate to open McDonald’s restaurants only those who really have solid growth plans.
In fact, as McDonald’s highlights , an initial investment to open up a restaurant might range from $1,008,000 to $2,214,080 (including a $45,000 franchise fee), and at least half a million of liquidity available to be invested into the business.
Franchisee can’t go on and open a McDonald’s on its own, instead, the land lease agreement has to go always thourhg the company.
In fact, McDonald’s keeps them separated.
On the one side, the land development process; on the other side, the franchisee selection and operations.
On the one hand, the company has a real estate arm dedicated to the selection of lands for developing new restaurants. As the company highlights :
McDonald’s looks for the best locations within the marketplace to provide our customers with convenience. We build quality restaurants in neighborhoods as well as airports, malls, tollways and colleges at a value to our customers.
Some of the key criteria for restaurant development are:
- 50,000+/- sq. ft.
- Corner or corner wrap with signage on two major streets.
- Signalized intersection.
- Ability to build up to 4,000 sq. ft.
- Parking to meet all applicable codes.
- Ability to build to a minimum height of 23′ 4″.
When it comes instead to the franchisees, McDonald’s offers a proven playbook and process to create a money-making restaurant machine.
- McDonald’s does use a heavy-franchised model. However, the company has tweaked the model to quickly expand its operations through franchising, while at the same time keeping control over standards followed by the franchisees, as McDonald’s operates as the landowner/operator.
- This tweak is extremely important as it helps balance out the otherwise too-aggressive franchising strategy , which is great for growth, but it might result in a loss of control over process and product quality standards.
- For that, McDonald’s has created two separate operations arms: one is a real estate development unit to develop the restaurant land; the other is the franchising operations to select franchisees and help them kick off operations.
That might also explain the high EV/Revenue Multiple of McDonald’s in the last years, as it rolled out a heavy franchised strategy.
- Heavy-chained business model
McDonald’s has found a balance between quick expansion and opening of new franchising by owning the land where franchisees operate and locking them in through contractual agreements, thus making sure they respect the group’s best practices.
Other restaurant chains, like Chick-fil-A, use the opposite model.
While growth in opening new locations is much slower compared to the fast pace players like McDonald’s, the focus is on ensuring the store is successful.
In fact, the initial fee requested from franchisees is way lower compared to McDonald’s ($10,000 vs. $45,000):
While the entry fee is lower, operating Chick-fil-A franchisees will have to pay a 15% royalty fee.
As the company explains in the franchise disclosure document as 15% of franchised restaurant sales, fewer amounts charged to franchisees for equipment rentals and business services fees, and 50% of net profits.
In short, the Chick-fil-A franchising model has the following features:
- It doesn’t require a net worth, compared to other franchising operations such as McDonald’s, as it’s the company that undertakes the expenses to open up a new restaurant.
- The franchising fee (entry fee) is just $10,000, compared to, for instance, McDonald’s $45,000 fee.
- However, the franchisee has to pay 15% of the net sales and 50% of the net sales.
- This makes sense as the franchisor and not the franchisee is the owner of the business, where the franchisee primarily operates the business.
- Therefore, the Chick-fil-A franchising operations look more like a chain model, while it skews its playbook in finding the right people to operate the business. In fact, of the applicants, only a tiny percentage of those make it up to become franchisees.
- Hybrid or franchained business model
The Coca-Cola Company has mastered a franchising model, which also works as a go-to-market strategy, which we defined franchained :
As we highlighted in the Coca-Cola business model analysis :
Coca-Cola follows a business strategy (implemented since 2006) where through its operating arm – the Bottling Investment Group – it invests initially in bottling partners’ operations. As they take off, Coca-Cola divests its equity stakes, and it establishes a franchising model , as long-term growth and distribution strategy .
More precisely:
While in the directly owned bottling facilities, Coca-Cola sells directly, in the concentrate operations, independent bottling partners manage distribution .
Therefore, Coca-Cola makes money by selling its concentrate to bottling partners ( they must place a full order for the concentrate available in that territory as part of the bottling agreement ).
As exemplified below, this is how the whole system works:
An opposite scenario might be that of using the franchising model in the short-term to test whether new markets are profitable by reducing the operational costs required to open new units and by speeding up the growth while internalizing them in the long run, if they turn out to be successful and strategic for the company.
This will work as a reverse franchained model.
The key differences between franchising and licensing
Franchising and licensing are similar in that they are both types of business agreements where one party pays another for the use of brands, trademarks, technology, and other business systems.
Most of the differences between the two approaches relate to the level of control and underlying intent of the transaction itself.
These differences can be summarised in the following points:
Level of control
In a franchise agreement, the franchisor has broader control over how the franchisee uses its brand and operates.
In a license agreement, the licensee has access to the licensor’s intellectual property and has more control over how that property may be used.
Business objectives
Franchise agreements exist primarily for the franchisor to grow its brand in a relatively passive way using established systems.
License agreements, on the other hand, are favored by independently run businesses that simply want to monetize certain technology or trademarks.
In the United States, franchise agreements are governed by state and franchise law.
However, it is general contract law that governs license agreements.
Key takeaways
- Franchising is a business model where the owner (franchisor) of a product, service, or method utilizes the distribution services of an affiliated dealer (franchisee). While most associate franchising with fast-food chains, the model can be traced back to the Singer sewing machine company.
- Franchising as a business model can be split into three types: traditional, business-format, and social. Most franchising agreements in place today are business-format agreements.
- Franchising is only successful if both parties act professionally and behave appropriately. This means following guidelines set out in a formal code of conduct or any applicable legislation.
Franchising models recap
Heavy-franchising models like mcdonald’s.
In a heavy-franchising model like McDonald’s, the initial fee, the investment to open up a restaurant, and the net worth required to operate the business is quite high.
To keep the standards high, McDonald’s has a dedicated arm that is in charge of land development and controls the rental agreement with the franchisees.
The franchisees, in turn, own the business and they will pay royalties to the company.
In a heavy-chained model, like Chick-fil-A
The initial fee to open up a restaurant, the net worth required to operate, and the overall investment required are much smaller.
Indeed, the company owns the whole operation, and it accepts applications from thousands of potential franchisees each year.
In this franchising model, therefore, the growth of opening new restaurants is much slower compared to the heavy-franchised model.
However, the company makes much more money from the franchising operations, as it gets high royalties as a percentage of sales, and it also splits profits with franchisees.
De facto, in this model, the franchisee is more like a high-profile manager than the business owner.
And in part, this is justified by the fact that Chick-fil-A bears the costs of opening these restaurants.
In a hybrid model
Or what we define franchained, a company can leverage a chain model in the short term and unleash the franchising model, once the operations have been established.
The Coca-Cola Company leverages this model to establish new operations.
An opposite scenario might be that of using the franchising model in the short term to test whether new markets are profitable by reducing the operational costs required to open new units and by speeding up the growth while internalizing them in the long run, if they turn out to be successful and strategic for the company.
What are the 3 types of franchises?
The three main types of franchising comprise:
According to the FourWeekMBA’s research, three other types of franchising models were identified:
What are the risks of franchising?
One of the major risks of a franchising strategy is the loss of standards, especially related to product quality. For instance, McDonald’s has figured out how to keep standards higher for its franchisees by controlling the land, thus making sure that the franchisee is aligned with the product’s standards.
What makes a good franchise model?
A good franchise model combines amplified distribution and growth by outsourcing expansion to franchisees while making sure these franchisees follow the core standards that the franchisor sets. Not everyone can run a franchising business model at scale. One of the companies that managed to run such a model is McDonald’s .
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A to Z of 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.
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.
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The Great Resignation Has Drawn Millennials to Franchising. Here's Why We Must Transform the Business Model.
As The Great Resignation continues to transform the professional landscape, the franchise industry must be ready to receive and grow a new and diverse demographic of leadership.
By Jeff Brazier • Oct 3, 2022
Opinions expressed by Entrepreneur contributors are their own.
The franchise landscape is changing as entrepreneurs get younger and more diverse than ever before — a shift that can be partially attributed to the ongoing "Great Resignation." During the pandemic, women left the workforce in droves to take care of their children when schools closed and required virtual learning. Many professionals also felt as though they had no control of their situation as layoffs soared and government restrictions kicked in. As women decide their next steps, they, and many other professionals, are using this as an opportunity to switch to a more flexible, more rewarding career that gives them more control over their futures.
A recent Wall Street Journal article highlights the Bureau of Labor Statistics report that more than 47 million Americans voluntarily quit their jobs in 2021 and says workers — especially, but not only, the young — began quitting their jobs in hopes of better conditions or opportunities. Franchise ownership is one of those better opportunities for this younger generation.
This has become evident in recent years, as Brandon Gaille research from 2017 shows that most franchise owners were between 45-54 years old, and recent data from Zippia.com shows that the average age has dipped down to 44 years old.
Over the past five years at Kiddie Academy Educational Child Care, franchise inquiries have changed from owners who were in the later stages of their careers to people switching to franchise ownership mid-career. The average Kiddie Academy owner inquiry is now from people in their late 30s to early 40s. We've also seen applications begin to come more from professionals with backgrounds in healthcare, event planning, technology, education and more, looking for a chance to become their own bosses . It's a paradigm shift that's transforming the franchise business model and how we must attract a new franchisee demographic.
Related: Why Millennials Make Great Franchisees -- And How to Recruit Them
Millennials' values are attracting them to the franchise industry
Franchise Insights says that millennials are leading baby boomers in seeking out franchise ownership opportunities and rank second only to Generation X. Because of this, franchise organizations need to find ways to attract a younger audience by focusing on ideals and benefits that are important to this group. And due to the pandemic and The Great Resignation, more families in this age range are looking for the ability to have flexible income and to mesh home life with work life .
Not even five years ago, many childcare franchisees were seeking to transition from their corporate career and begin to plan for what retirement might look like. Now, people in the earlier stages of their careers with young children, who desire flexibility and a way to make a difference, have been rising to the top of inquiries.
Franchising is a great way to localize a large brand, leveraging the resources of a network of businesses to make a local impact. According to Gallup , millennials are also looking for ways to create an impact on their communities, so the franchise model provides the perfect vehicle for making a difference. At our franchise, we've found having benefits in place that support these aspirations is important to attract this generation of franchisees. Our Community Fund is an example of this effort, where teachers and staff at Academy franchise locations are offered financial support during times of hardship through grants.
Related: How Franchises Can (and Should) Attract Millennial and Gen Z Franchisees
We must transform the franchise business model for millennials
At the corporate level, franchise organizations need to take a good look at their policies and values and use insights about millennials to shift support to those priorities. Focusing on the flex benefits of franchising combined with cutting-edge technology, the opportunity for entrepreneurship and a strong income at an early age are all things that can combine to create a desirable opportunity for millennials.
Highlight the impact the business has on its community. Use technology and design to make the business what consumers are looking for with apps, two-way communication tools and more. Meet millennials where they are online in places like Instagram, TikTok and Snapchat. Help them connect with people who can support their vision. Combine all these elements together, and the franchise model will be more attractive than ever to the newest group of up-and-coming franchisees .
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The Benefits of the Franchise Model
Franchising provides benefits for both seller and buyer. For franchisors, the primary benefit is the ability to use other people's money to expand the brand more rapidly than they could either on their own or through investors or lenders. The initial franchise fee and ongoing royalties they collect allow franchisors to build their brand without sacrificing control to outsiders or the pressure of repaying lenders. The fees and royalties are used to fund operations at corporate headquarters, train and support franchisees, market and advertise the brand, improve the quality of goods or services, and build the brand in the marketplace.
For franchisees, benefits include: a higher chance of success than in a sole proprietorship; shorter time to opening; initial training and ongoing support; assistance in finding an optimal site; the selling power of a known brand; lower costs through group purchasing; use of an established business model; national and regional advertising campaigns; customer lead generation through websites and centralized call centers; and a network of peers (fellow franchisees) to provide advice and moral support through a company intranet, annual conferences, and franchisee associations; and, increasingly, assistance with securing funding.
Potential downsides for franchisees include: lack of independence, from the goods and services they sell to the color of the paint on their walls; mandatory company-wide promotions that may not work in their market (price cuts, new products or services), yet cost money to implement; costly required redesign of their unit(s); and, after signing a 10- or 15-year contract, a change in management or ownership that takes the brand in a new, unwanted direction.
As with any business opportunity, there is no guarantee of success, and there are trade-offs to be made. In some ways, franchising is like paying condo fees instead of owning a home. In a condo association, monthly fees are pooled for common external maintenance (mowing, snow removal, roof repairs, etc.) – a tradeoff many are willing to make to free themselves to concentrate on their "core business" of living their lives (or business) within the walls of their condo (or franchise) unit. And unlike renters, who can be evicted (or corporate employees who can be fired or "downsized") franchisees have some power of their own: a franchisor cannot "fire" a franchisee who is operating in compliance with the franchise agreement.
"Follow the system" is a mantra in franchising and critical to a franchisee's success. Franchisees buy into the franchisor's operating system believing that if they follow it to the letter they will succeed and be profitable. Smart franchisors are always open to suggestions from their franchisees for change (as well as local or regional variations), but any franchisee departing from the "system" without franchisor approval risks violating the terms of the franchise agreement, which can result in revocation of the franchisee's right to do business under the franchisor's name. Franchisees also must agree to keep the franchisor's proprietary system and trade secrets confidential, as well as sign some type of noncompete agreement.
Not everyone is cut out for franchising. Some need total independence to succeed or fail on their own, while others prefer the tradeoffs found in working for a larger organization. For the franchise partnership to succeed, the buyer must be comfortable not only with the franchise model, but also with the culture, values, and goals of the franchisor — and vice versa.
In this light, many view franchising as a commitment much like a marriage. A good match between franchisor and franchisee, sharing mutual goals over the long term, is essential to the success of each franchise unit, and thus the brand as a whole — an essential factor that must be considered seriously by both parties before any contract is signed.
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Types of Business Models
Franchise business model.
The franchise business model is usually the business model chosen by those who want to start a new business, but do not have much idea how to begin it. That is because the franchising system allows you to acquire a ready-made business, with a consolidated brand and know-how already tested. Virtually, you buy a brand and all the processes. That way, since you don’t have to start from scratch, there is no need to test the entire business model from the beginning. You basically invest in a ready-made business and apply its processes and techniques to the location you choose. On the other side, the business owner benefits from not having to invest in new outlets or units. Instead, they distribute their goods or services through licensed sales points, thus increasing their brand presence.
What is the franchise business model?
The franchise business model is totally based on the relationship between two sides: the franchisor and the franchisee. The franchisor is the person or company that owns the rights to a brand trademark. The franchisee is the one that pays a fee in order to use the franchisor’s trade name and operating systems. This relationship is built on mutual understanding and support. Take a look:
The franchisor
- Sells the rights to franchise their brand;
- Develops the business, with its brand and operations;
- Provides a recognizable trademark;
- Offers training and support;
- Creates a marketing strategy;
- Sometimes mentors the site selection and structure.
The franchisee
- Pays the franchisor a fee that can be an initial or recurrent payment (royalty);
- Operates in accordance with a specified contract;
- Acts as a branch of the franchise company;
- Gains access to an established customer base;
- Benefits from brand recognition;
- Takes advantage of a ready-made business with all its know-how;
- Runs the day-to-day business.
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A brief history of franchise business model
The franchise business model is not recent. On the contrary, it dates back to the Middle Age and ancient China, when landowners allowed peasants and serfs to do business on their property – such as hunting or selling products at fairs – as long as they paid a kind of tax or commission on business done in their territories. The modern business model franchise is supposed to have started with Benjamin Franklin when he made an agreement with Thomas Whitmarsh to provide printing services in Charlestown, South Carolina, in the year 1731. More than a century later, Isaac M. Singer would again use the franchise business model to distribute his Singer sewing machines. But the model would only become popular after another hundred years, with the appearance of McDonald’s. Nowadays, there are thousands of od franchises all over the world.
Types of franchise business model
There are two types of franchise business models. They are:
Product distribution franchise
In this model, the franchisor is also the manufacturer of the product, which will be sold by the franchisee. I t is similar to a supplier-dealer system, however, with the difference that the franchisee must sell that brand exclusively, and cannot resell others simultaneously. For example, John Deere and Ford Motors.
Business Format Franchise
This is the most recurring business model franchise. In addition to using the franchisor’s trade name and brand, the franchisee has access to marketing and sales strategies, distribution and operations systems, as well as training and support. Some examples include Dunkin Donuts and McDonald’s.
The advantages of the franchise business model
For the franchisee.
- Quality brand-recognition
- Expert support and training
- Established customer base
- Proprietary technology
- Location assistance
- Operational guidance
- Marketing and advertising
- Access to a network of fellow franchisees
- Shorter time to opening
For the franchisor
- Quick brand expansion – through other people’s money
- Growing without sacrificing control
- Stable revenue stream
- Savings on operational costs
Disadvantages of the franchise business model
The downsides of the franchise business model are more specific to the side of the franchisees. They may include lack of independence on how to run the business, some mandatory national or regional strategies and promotions that may not work in the franchisee’s market, high cost of implementation, and others. Of course, like any other kind of business, there is no guarantee of success in the franchise business model. Sometimes, franchisees believe that, just by following straightly the franchisor’s system and operations, their business will be profitable. Buy that is not actually true. Not everyone is cut out for franchising. It is indeed a business model based on a kind of partnership. So, both sides need to be comfortable about the franchise business model, regarding the company culture, values, goals, mission, etc. Franchising is like a marriage, they must share mutual ideas over the long term, in order to be profitable and successful.
The future of franchise business model
Artificial intelligence will play a bigger role. Probably technology will take over many ordinary tasks that don’t require skilled human resources. It is the case of some fast-food franchises, for example, which have already been using computers to get customers’ orders – sometimes, even remotely. Franchises will grow around the world. Franchises have been rapidly expanding over the planet. Countries that did not exist for some companies, a few years ago, have become new and profitable markets for foreign franchising investments. Remote franchises have become popular. Last but not least, with the advance of technology associated with the coronavirus pandemic, some remote franchises have taken a bigger market share, due to the tendency of working from home.
Daniel Pereira
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8 Reasons to Consider Franchising
Franchising can be a tempting business avenue to pursue. Here's everything you need to know.
- A franchise is a business model that allows owners to sell goods and services under an established brand as a part of a leasing agreement.
- Franchises offer various benefits that differentiate the model from typical small businesses.
- You’ll need to follow a legal process when starting a franchise to protect the franchisee and finalize the agreement with the franchisor.
- This article is for anyone exploring the potential of franchising a business.
More times than you can probably remember, you’ve likely visited a 7-Eleven, KFC, McDonald’s or Dunkin’ to enjoy the convenience and services of a brand you know and trust. These businesses are products of the business expansion practice called franchising. Their owners invested in a known brand in hopes of finding business success.
Franchising allows bigger businesses to branch out and grow while giving entrepreneurs and small business owners a chance to run their own operations with the help and support of a larger organization with a proven formula for success.
Franchising is a tempting way to find business success. However, it’s essential to understand what’s involved before taking advantage of this less risky – yet still rewarding – option for starting a business .
Editor’s note: Considering opening a franchise? Fill out the below questionnaire to have our vendor partners contact you with free information.
What is a franchise?
A franchise is a business model where a business owner provides products or services under the branding and rules a parent corporation sets. The parent corporation assists its franchisees with marketing, inventory and support. When opening a franchise , the franchisee pays the franchisor royalties and usually submits an initial franchise fee to do business under the brand’s name.
Essentially, franchises combine working for someone else and working for yourself in two categories:
- Product and trade name franchising: Product and trade name franchising is when you buy or license the right to use someone’s product or trademark.
- Business format franchising: Business format franchising is more complex because the franchisor provides franchisees with a full range of services and support. The franchisor lays out specific rules and conditions, and the franchisee agrees to abide by them.
Opening a franchise is an opportunity to start and run your own business without having to build a brand from scratch.
How is a franchise different from other small businesses?
Business franchising isn’t for everyone; many would-be entrepreneurs prefer to start a business from scratch. Both franchising and starting a new business have benefits and disadvantages, and being a business owner in any capacity is risky.
Here’s a look at how franchising differs from starting a new business:
- Franchises have less freedom. Starting your own business gives you the freedom to make every decision, small and large. This freedom allows you to create your vision, but it can be overwhelming. With a franchise business, you have less freedom but more support. You sign an agreement outlining all conditions. You receive the tools, support and structure to run the business as laid out by the franchisor. Franchisees usually lease all necessary equipment.
- Franchises enjoy instant brand awareness. When you start a new business, you’re tasked with building a brand according to your vision. Brand building can be challenging but rewarding. When you open a franchise, you enjoy instant brand awareness. Your brand is established; however, you don’t have the freedom to tweak it to your liking.
- Franchising startup costs can be high. Starting a new business and opening a franchise both require significant monetary investments. Business startup costs can range from a few thousand to tens of thousands of dollars. Franchise funding can be pricey; you’ll likely need to secure a loan or line of credit to cover franchising fees and real estate costs. However, you may be able to use your franchisor’s investor relationships to secure funding.
- Franchise business operations are standardized. Day-to-day operations are different for franchises and original small businesses. Franchises are meant to be the same regardless of where you go; think of the Subway or Chipotle assembly-line meal-creation format. A small business doesn’t have to follow any specific format and can operate how the owner wishes.Franchises have a large pool of buyers. If you want to sell your independent small business, you can enjoy significant profits if you find the right buyers. Selling a franchise means you’ll have a larger customer pool that wants to benefit from the brand name. If a franchise owner can’t find a buyer, the franchisor may be willing to buy back the operation. However, an independent small business owner may be out of luck if they can’t find a buyer.
If you’re applying for a franchise loan, concentrate on boosting your personal credit score because you won’t yet have a business credit score .
Benefits of opening a franchise
Franchises offer many benefits to owners, including the following:
- Franchises have access to proper training. Opening a franchise means you get a set of rules to follow and a parent company with resources. With provided guidelines, franchisors can give franchisees proper training in running the business to ensure the best chances of success. For example, McDonald’s famously has its Hamburger University, a training program to help people learn the McDonald’s way and maintain the company’s methods of running things.
- Franchises receive marketing help. Parent companies assist franchisees with marketing strategies and materials. In a world of social media, SEO and everything in between, running a business without marketing stress can be a significant benefit. Typically, franchisees pay a monthly fee to the parent company’s advertising budget, which is run by a team of experts.
- Franchises have the support of a big company. The parent company’s support goes beyond training and marketing. The franchisor may provide equipment and other resources to get you started and help you throughout your franchise tenure. If new features, products or equipment is needed to advance your business, your franchisor typically has the means to help. Other support resources include call centers, advice and support channels, and conferences.
- Franchise funding can be easier. A franchise’s built-in market and established presence can make lenders more comfortable because they’re providing money for a business with a proven track record.
- Franchises enjoy improved buying power. Your franchisor will likely be able to negotiate better rates for supplies and materials than you’d receive as an independent business owner.
- Franchises give you a faster ROI. With any business, return on investment (ROI) is crucial in measuring business success and growth. Franchise owners can open their doors more quickly and often have a built-in customer base. You’ll enjoy a faster ROI as customers flock to your store, knowing what products and level of quality to expect.
- Franchises can navigate legalities more easily. Parent companies can help franchises work with state and federal regulations to comply with laws and handle legal proceedings.
How to open a franchise
With an understanding of franchising’s benefits, here’s how to get started opening a franchise.
1. Research franchises and costs to find the right fit.
Fully research franchise options and determine which companies will offer you the best return on investment and provide you with the best chance for a consistent income stream.
Financing is a significant factor when choosing a franchise. Franchising is essentially leasing a business, so you must ensure it’s a financially worthwhile venture.
Consider the following factors when evaluating potential franchise investments:
- Average franchise revenue
- Starting capital
- Royalty fees
- Marketing fees
- Miscellaneous fees
- Franchising fees
Read our reviews of the best business loans to help find funding for your franchise business.
2. Evaluate your franchise’s potential.
After factoring in franchise costs and determining if the franchise would provide a good ROI, consider its potential. For example, what competitors are in your area? Do your target customers live nearby?
Ensure there are no other franchises of the parent business near your location. Although some franchises can support multiple locations, such as Dunkin’ or Starbucks, it’s crucial to ensure you’re not setting up a competitive location that could underperform.
To choose the right franchise , consider your personal goals, the industry you want to work in and the type of commitment you’re willing to make.
3. Create a business plan for your franchise.
To ensure you’ll be granted a franchise and ultimately secure funding, creating a business plan is crucial. You’ll present your business plan to investors and others to share your goals and profitability expectations.
4. Complete all necessary paperwork for your franchise.
To get the process going, the franchisee must prepare their paperwork and business arrangements. You’ll be asked to sign a franchise license agreement. Review and understand the agreement before signing it and committing to the franchise.
You’ll also need to choose your legal structure, such as forming a limited liability corporation (LLC) . Franchisors require different business entities based on their overall structure, so work with the parent company during this process.
5. Choose a business space for your franchise.
Once you’ve established and solidified your business proceedings, it’s time to find a place for your business. Your franchisor may have requirements on necessary space, so consider your agreement’s conditions before securing a property lease .
When you choose your location, ensure you’re not too close to a fellow franchisee or company-owned building.
6. Hire employees for your franchise.
The next step is hiring employees . Your franchisor may assist you in the hiring process and offer training programs and resources. Whether it is an intranet system provided by the parent company or detailed job descriptions, the franchisor can help you with your search for employees.
7. Plan your franchise’s opening day.
With everything in place, it’s time to plan your opening day. When it comes to services like marketing, consult with your franchisor and engage in social media marketing and local press outreach. For in-store activities, check to see what is allowed within your franchise agreement. If possible, try to create a memorable first impression with the community.
Franchising can be your path to business ownership
Paving the way for a new business isn’t easy. However, opening a franchise brings the benefits of entrepreneurship with the resources of a large parent company. Business ownership at any level is risky, but franchising can bring career fulfillment with a measure of support. Conduct your franchise search thoughtfully, and consider hiring legal assistance to guide your path.
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SG Franchise Advice
Right advice . expertise . success, franchise model: all 4 explained in detail.
Every franchise model is of different type.People unaware of this, miss out on the most suitable franchise opportunity. Many people do not know that every franchise model is not same. Hence let us try to understand every franchise model in this blog.
There are four different types of franchise models. Namely Company Owned Company Operated, Company Owned Franchise Operated, Franchise Owned Company Operated, and Franchise Owned Franchise Operated. Let us understand their characteristics, advantages, and disadvantages.
It will be easy to understand every franchise model if the reader is aware of
What is franchising or franchise?
How franchisor and franchisee gets defined?
If somebody is not aware, then they can read it here . After knowing what franchising is, the next thing to understand is every franchise model in the business.
If you understand Hindi then you should watch this video . This video explains franchising and every franchise model
The following are the four categories of franchise model s .
Company Owned Company Operated Franchise Model
Company Owned Company Operated, in short, known as COCO . As the name suggests in this model, the company owns and operates the business at a particular location. It is the Franchising company that bears all the capital and operational expenses. This model is suitable for the franchisors with following features
- A franchisor is unable to find a suitable franchisee for a specific location where it sees good business potential. Hence, as a solution, the franchisor opens its outlet
- Franchisors who have a deep pocket so do not feel the need to share profit with franchisees.
- A franchisor could initially start with its outlets and then take the franchising route. Thus, those initial outlets are COCO.
- Some franchisors open a outlet as a flagship store. This enables a future franchisees to see the required infrastructure and also get ‘look & feel’ of an outlet.
Example Of COCO Franchise Model
The company-owned outlets that we come across are examples of COCO. These company-owned outlets exist across the industries. From automobiles to computers, from Jewelry to fashion. Across the swathe of sectors, we can find many examples of company-owned and company-operated models.
Advantages Of COCO Franchise Model
- It helps a company to showcase its outlet and product range to customers and prospective franchisees.
- The entire profit goes to the company as there is no channel partner to share.
- It helps the company to expand in areas where it is not finding a franchisee.
Disadvantages Of COCO Franchise Model
- A FOFO outlet can have efficiency and productivity issues as employees manage it and not an entrepreneur.
- A company diverts its energy and resources on activity which is not its core business i.e., running and managing an outlet.
Company Owned Franchise Operated Franchise Model
Company Owned Franchise Operated, in short, known as COFO . In this model, a franchising company does capital expenditure, site selection, property deposit, and some other expenses. At the same time, the franchisee takes care of additional operational costs like salary, electricity, and sundry expenses. One payment that can go either way is rent. In some cases, franchisor bears the rent, and in some cases, the franchisee takes care of it. Some expenses are incurred by either party. That depends on the terms and condition set by the franchisor.
In this case, initial expenses for the franchisee is low. An important thing to remember is, with lower investment, there would be lower profit/revenue share for the franchisee.
A franchisor uses this model when
- The franchisor does not want to increase its operational expenses.
- The franchisor does not have the bandwidth to manage the systems and processes for its employees.
- When a franchisor needs people, who could run and maintain the store as an entrepreneur does. There is a visible difference when an employee manages a store and when an entrepreneur runs it.
Example of COFO Franchise Model
A franchisee (contractor) manages the canteen in corporates, factories, hospitals, and other establishments owned by a company. Another famous example is call centers that handle inbound, or outbound customer calls on behalf of a company. Then we have company outlets, especially at a prime location, managed by a franchisee but owned by the franchising company.
Advantages of COFO Franchise Model
- The efficiency and productivity of the outlet are high as an entrepreneur manages it.
- No operational expenses to bear.
- Resources of franchising company does not get diverted into an unrelated aspect of the business.
- A company can open its outlet in the areas where it is not finding the franchisees.
Disadvantages of COFO Franchise Model
- Customer experience is in the hand of a franchisee. If it is not at the desired level, then the company name gets spoiled.
- If a franchisee decides to quit, then the company may be in a quandary about the way forward.
- A franchisee does not incur any capital expenditure, so its profit share is limited.
Franchise Owned Company Operated Franchise Model
Franchise Owned Company Operated, in short, known as FOCO. In FOCO, it is the franchisee that owns the property and does the other capital expenditures. While, franchising company manages the store/outlet operations . This model is also known as Franchise Invested Company Operated.
FOCO is one of the more popular models with the international food chain in India.
By having their employees, the franchisor controls the quality of the product served and the service that customers experience. This control over the quality of products and services ensures that the customers get what they expect from the brand. Franchisors who are very careful about their brand name and image would take responsibility for the end-user experience themselves. They cannot let the critical aspect like end-user experience in the hand of franchisees lest they spoil it.
Example of FOCO Franchise Model
Any company that is highly conscious about its brand image will keep the customer experience with itself. Many international and national food chains. Many electronic brands. Some companies in the jewelry segment, and companies in some other sectors have franchise owned company operated models.
Advantages of FOCO Franchise Model
- As a franchisee not involved in the day to day operations so it can focus on its other businesses
- As customer experience is in the hand of the company, customer handling is better.
- The franchisee does not pay for operational expenses, and the company does not pay for capital expenditure (set-up expenses).
Disadvantages of FOCO Franchise Model
- Franchisee gets profit share, which at times is just little over the rent of property plus the cost of capital. Thus not a lucrative proposition.
- Not suitable for people whose intent to take property on rent to become a franchisee.
- No involvement of the franchisee in day-to-day affairs results in limited learning opportunity.
- There are a high investment and limited opportunities for prospective franchisees under this model.
Franchise Owned Franchise Operated Franchise Model
Franchise Owned Franchisee Operated also known as FOFO, which means that a franchisee provides for capital and operational expenses. The franchisee manages the entire show within the guidelines given by the franchisor.
Most of the upcoming and established brands take the FOFO route as they find it easy to run and manage. In this model, the franchisor has minimal expenses as most of the costs are born by the franchisees.
As franchisee has made most of the investment, so it gets the major chunk of revenue. While a franchisor gets a small share in the form of royalty.
FOFO model is risky for the franchisor as the end-user experience in the hands of franchisees. Thus it becomes important for the franchisee to ensure that the franchisor’s brand name does not spoil due to their business practices.
Example of FOFO Franchise Model
Every franchise opportunity in which a franchisee makes the entire investment and also takes care of all other expenses is an example of a FOFO model. More than 90% of franchise opportunities fall in this category.
Advantages of FOFO Franchise Model
- Many franchise opportunities to choose from.
- Franchise opportunities across budgets.
- A successful franchisee has an excellent return on investment.
Disadvantages of FOFO Franchise Model
- The variance in expectation vs. reality can overwhelm a first time franchisee.
- Higher failure rate compared to other franchise business models.
- Some franchisors see this franchise model as a shortcut to success. So they may have high franchise fees and other investments making, return on investment period unattractive.
Every franchise model serves a specific purpose only. When that model gets used for that specific purpose, then the advantages outweigh disadvantages. Furthermore when any franchise model is used with a stretched purpose, then its defects will be more visible than its benefits. Thus a franchisee needs to have clarity on the purpose of taking a franchise. And match the purpose with the features of the respective franchise model. If purpose and feature match then only a prospective franchisee should go ahead.
Summary of Franchise Models
There are four types of franchise models
Company Owned Company Operated (COCO ): An outlet owned by a company and managed by the company.
Company Owned Franchise Operated (COFO ): An outlet owned by a company and managed by a franchisee.
Franchise Owned Company Operated (FOCO): An outlet owned by a franchisee and managed by the company.
Franchise Owned Franchise Operated ( FOFO): An outlet owned by a franchisee and managed by the franchisee.
Excerpts from Franchisee Notes , available at Amazon Kindle click here . A must read book for people interested in taking a franchise business.
Copy right © Sumeet Garg.
No part of this blog can be used without the written permission of the author.
Please feel free to connect if you have any query on any aspect of franchising.
Disclaimer : Reading this blog does not create an advisor-client relationship between us. This blog should not be used as a substitute for the advice of a competent franchise professional on the topic of franchise models .
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