Franchise Business Model – Explained with Benefits and Examples


McDonald’s, PizzaHut, Starbucks and FabIndia.

You can find many stores of these brands in a city. Have you wondered why? The answer is franchising.

The franchising business model is one of the tried and tested models to start a business, especially in highly competitive industries such as food, beauty and retail.

It has many benefits such as readymade brand awareness and an established base of loyal audience before you even start the business.

Though franchising existed from the middle ages, the modern-day franchise business model was started by Benjamin Franklin in 1731.

The first franchise agreement was between Benjamin Franklin and Thomas Whitmarsh. Today, there are thousands of successful franchising businesses in India.

Let us take a deep dive into the franchise business model and know its pros and cons.

What is a Franchise Business Model?

A franchise is a business model where an individual entrepreneur (franchisee) operates the business using the company name,  trademark, logo, branding, products and business systems of a larger company (franchisor), in return for a fee and other payments such as licensing fee, royalties, etc, depending on the terms in the contract between both the parties.

The franchisor can offer any one or a combination of the different types of franchise ownership options to the franchisee.

Types of Franchise Business Ownership

  • Single Unit Franchise – The franchisee purchases single-unit ownership from the franchisor.
  • Multi-unit Franchise – The franchisee purchases multiple franchisees of the same franchisor.
  • Master Franchisee – A master franchisee agrees to open a fixed number of franchises within a specified time. The master franchise can also sell franchises to other franchisees on behalf of the franchisor.

Who is a Franchisor?

A franchisor is a large parent company, which sells the rights to use its brand name, trademark, logo, products, and business intelligence to individual entrepreneurs.

Most companies sell franchises to expand the business to newer markets, gain additional revenue and increase sales.

Who is a Franchisee?

A franchisee is an individual entrepreneur, who buys the franchise from the parent company. The franchisee benefits from the established brand name and business intelligence of the parent company.

Franchise Vs Startup

While franchising is a lucrative business opportunity, starting a business from scratch has its own advantages.

Understanding the pros and cons of both options aids in taking an informed decision while starting your business.

Pros and Cons of Franchise Business Model

Pros

  • Franchising provides an opportunity to start off with an established brand name and loyal users.
  • The parent company provides business intelligence such as market research, consumer analysis, etc.
  • You can benefit from the tried and tested business operating systems and established protocols of the franchisor.
  • Parent company’s marketing and advertising campaigns help to improve sales of franchisees as well.
  • The risk of failure is low as the brand name and products are already established.
  • You can have a clear exit strategy as the franchisee can sell off the franchise to another party if you want to retire.
  • The training and support from the parent company help to sharpen your business knowledge.
  • It is easy to get funding as the franchisor’s business model is already established.  

Cons

  • Purchasing a franchise involves huge expenses in terms of franchising fees, licensing fees, royalties, etc.
  • The franchisee has to follow the mandates of the franchisor such as offering discounts and coupons, remodelling premises, etc., which eat into your profits
  • Supplies have to be purchased from the approved vendors of the franchisor, which may lead to inflated prices
  • Any change in the brand image of the parent company can affect your business
  • The franchisor is the boss, so there is limited freedom for the franchisee.

Pros and Cons of Startup

Pros

  • If you have a unique idea, launching a startup provides an opportunity to aim for the big league.
  • The initial costs of setting up a startup are less in comparison to taking a franchise.
  • You are the owner of the business, so the decision making power lies in your hands.
  • If the startup is a success, You can become a franchisor and earn revenue through franchising.
  • Startups have a high potential to earn profits if the business model is good.

Cons

  • There is a high risk of failure. 95% of the startups are not successful.
  • You have to work hard to set up the business systems and protocols.
  • Business operations start from scratch so it takes time for the startup to take off.
  • You have to invest in business intelligence and market research.
  • Creating brand awareness with targeted marketing and advertising campaigns is time taking and challenging.
  • Drafting an exit strategy can be cumbersome if your startup is not successful.
  • The startup may take a long time to generate revenue and reach breakeven.
  • There is no external support. You are on your own.
  • You have to provide that your idea is unique and viable to get funding from investors.

Franchise  Vs Startup

S.noPoint of DifferenceFranchiseStartup
 InvestmentHuge investment in terms of franchise fees, licensing fees and expenses to buy/rent and modify the premises.The costs of launching a startup are less in comparison.
 EarningsThough the earnings are good, the costs of offering discounts, schemes etc. mandated by the franchisor can eat into your income.If the business model is foolproof and the idea unique, there is a scope to earn huge revenue.
 FinancingThe franchisor is a well-known name in the industry with an established business model, it becomes easy for the franchisees to get financing.Procuring financing for startups is challenging. You should have a proof of concept and prepare a pitch to attract investors.
 RiskRisks are low as the business model is already established.Building a business from scratch is a high-risk proposition.
 Decision-makingThe franchisor is the decision-maker, the franchisee has limited authority.The entrepreneur is the boss of his enterprise, all decision-making powers vest with him.
 SupportThe franchisor provides business intelligence, marketing and advertising support, and training.Unless you have good connections and mentors, there is no support. You are on your own.  

How does the Franchise Business Model Work?

A franchise is a contract between the franchisee and the franchisor.

It is a temporary contract that provides the franchisee with controlled rights of the business in return for fees, royalties or a percentage of sales.

The terms of the contract vary depending on the industry and the business model of the franchisor.

There are three primary franchise business models.

  • Product Distribution Franchise –  Under this model, the franchisor manufactures the product and the franchisee sells the product. The franchisor gives exclusive or semi-exclusive rights to the franchisee to sell the product in a particular geographic location. For example, car dealership franchisees of popular brands like Ford, General Motors, Honda etc.
  • Business Format Franchise – This is the most common franchise business model. Under this model, the franchisee is given rights to use the product distribution model of the franchisor along with the Trademark and brand name. The franchisee does not only sell product/service but also delivers customer service in accordance with the standards of the franchisor. The customer cannot differentiate between the company-owned and franchised store because of the similarities in decor, products, service and experiences. For example, franchisees of popular food chains such as  McDonald’s, Starbucks, and Dunkin Donuts.
  • Manufacturer Franchises – Under this model, a manufacturer obtains exclusive rights to manufacture and distribute the products of the franchisor. The manufacturer has to adhere to the quality standards of the franchisor and ensure that the products are indistinguishable from those manufactured by the franchisor owned facilities or other manufacturers. This model is common in the food and beverage, apparel, and automobile industries. For example, Coca Cola gives manufacturing franchisees to local manufacturers at different locations.

Benefits of Franchising

Franchising business models offers many advantages to both the franchisor and the franchisee.

Here are a few important benefits of franchising.

Benefits To the Franchisee

  • Working with an already established brand offers a competitive advantage and helps to improve sales opportunities.
  • The chances of failure in franchising business are low in comparison to a startup
  • Simplifies the procurement process as the franchisee will have access to quality suppliers and good deals
  • Low advertising and marketing costs as the franchisor takes care of the advertising campaigns.
  • The franchisee can benefit from the experience and leadership of the franchisor.

Benefits to the Franchisor

  • Franchising is an efficient method to expand into new territories and markets.
  • Additional revenue in the form of franchising fees, licensing fees, and royalties.
  •  Additional advertising from the franchisors can boost brand awareness.

Franchising is a proven business model that benefits both the franchisor and the franchisee. However, it has pros and cons.

The franchise business model is suitable for entrepreneurs, who want to start a business with an established presence and customer base.

However, it is recommended to research the franchising opportunities to ensure success.

Reader’s Insight

Let us know if we missed out on anything in this article Franchise Business Model and share your thoughts in the comment section.


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