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Franchise Business 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.

How to setup Franchise

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.

"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 for change (as well as local or regional variations) from their franchisees, 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 non-compete 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. 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