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Franchising 101 – Franchise Business Model Overview

           

Franchising Business ModelA franchise business model is based on leveraging another company’s proven processes, systems, technology, in operating the business — essentially becoming the franchisor’s strategic partner by following their model and duplicating their success in your region.

Franchising is often referred to as an industry, but it is more a business model applied to different industries. Franchising provides a plan and a support network for creating business success with the highest potential for profitability with the least amount of risk.  At least that’s the concept. Boiled down to its absolute most essential elements, a franchisee can be consider the strategic partner and the franchisor is the founder.

What is a Franchisor?

A franchisor is the person or company that owns the intelectual property the defines the business — the business model, processes, systems, branding, etc.  The franchisor may or may not have created the business.  In some instances, a company that is great at franchising finds a great business and approaches the owner to allow them to franchise that business.  In many cases, the person that originally defined and created the initial business success simply does not have the skills, capital, or interest in becoming a franchisor. So they allow another company to franchise the concept and receive a percentage of the royalties.

What is a Franchising?

Franchising, put simply, is an approach to expanding one’s business. Instead of opening an owning the locations in various regions, the owner of the business concept (franchisor) decides to expand by granting others (franchisees) the opportunity to operate a proven business, usually in a protected region or territory for a defined period of time. The risks of success for the franchisee are smaller if the track record of the business is proven. The expense of start up is generally smaller and the training for running and operating the franchise is typically provided. A quicker start, proven products or services and a traceable record of success can be a lure for any who wants the opportunity to operate their own business.

Franchise Business Models

The franchisor wants their franchisees (strategic partners) to succeed. With their success, the franchisor becomes more successful, which is why franchising makes sense. In order for this to happen, the franchising business model usually follows a plan that conforms to certain aspects:

  • Royalties — The use of a name, proprietary stock or equipment entails paying the franchisor a royalty or commission for the duration of the contract period. There are usually two forms, a flat fee or a percentage of sales. Either has benefits and drawbacks. A flat fee may initially cause the franchise owner problems while the business is becoming established but enables a greater reward once the business is more successful. A percentage can be an easier way to pay initially but as business grows, more of the profits go back to the franchisor.
  • Consistency — Every location of the franchise is designed to function precisely as the others. The franchising business model depends on the customer being able to expect the same service, quality or product in every location. The franchise owner is bound by contract to follow the proven model of success.
  • Marketing — The brand is established. It may be regional, national or international. Generally the company handles most of the marketing and advertising. The franchise owner may or may not be required to contribute to an advertising pool. Either way, others determine the best methods of marketing and advertising the brand and the franchise owner receives the benefits without the headaches of trying various media options.
  • Purchasing Power — An independent business owner is at the mercy of buying supplies at the same price as other independent competitors. The franchising business model, because of the larger numbers, often wields better buying power. Franchise owners enjoy this aspect of the franchise business, which keeps them far more competitive and more profitable in the marketplace.

Although the restrictions and agreements with the franchisor may seem constricting, the rewards can be impressive. Those who can adapt easily to a franchise business model often find themselves investing in other franchises, increasing their territory, market share and wealth.

Have any questions regarding the franchise business model? Have more to add concerning what is a franchise? Start or join the discussion and leave your questions and comments in the box below.

About the Author, CFO Team

The Canadian Franchise Opportunities team is a dedicated group whose primary purpose is to help inform those exploring franchising as a potential business model. We believe that through education we can help prospective franchisees make better decisions when evaluating, selecting and buying a franchise.
 
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  • Chad Ward

    I would be interested in a low startup few franchise

  • CFO

    Chad, when you say “low startup” are you referring to the fee for the franchise or the total cost of starting the business?

    For example, the franchise fee for a Perma-Dry franchise is around $40K, but there are additional costs requiring additional capital to start the business. So, when you look at the cost, you need to look at both the franchisee license fees and the total costs to start the business.

    Also, something else to think about . . . a low cost franchise may be priced to match its profit generating capability. So low cost is not always your best way to pick a franchise. I would recommend looking at the cost of a franchise in conjunction with its profit potential. In the end, you may be better off spending more for a franchise that has the potential to generate the profit needed to get a solid return on your investment (ROI).