A company’s business model refers to the plan through which the company intends to profit. Every business or company is brought up from the ground by following its specific business model. It doesn’t only help the company in its profit upbringing but also attracts investment, talent, and motivation to the company.
There are a plethora of business models regarding various types of businesses and organizations. However, in this particular case, we will dive into a specific business model which has played an extravagant role in bringing your favorite international brands to your own countries and cities.
The Franchise Business Model
You have often heard the term franchise, which originally refers to the distribution of products or services under a brand’s trademark. This allows the brand to expand rapidly and scale its reach to places that cannot be supervised by a single management team.
To put this into simple terms, this business model consists of two major components: the franchisor and the franchisee.
- The franchisor allows other independent business owners to use its branding, business models, and other business properties.
- The franchisee pays a franchise fee and ongoing royalties to buy the franchise from the franchisor.
In addition to the financial aspect, the franchisor-franchisee relation should be built upon mutual agreement and respect for the business aspects. This relationship plays a great role in the expansion of the business empire and the brand identity.
Types Of Franchise Arrangements
The three most common types of arrangements are found in this specific business model. Each type complements its own business circle, which any company can adopt in context to its own business idea.
1. Product Franchise
Through this agreement, the franchisee exclusively sells the products or services provided by the parent company. This is quite an old agreement method in the franchising business and is still used by some global brands like Coca-Cola and Ford.
2. Business Format Franchise
Under this agreement, the franchisor buys the rights to do business using the franchisor’s trademark and business model by paying the franchise fee to the company. In addition, the franchisor also earns a percentage of the revenue the franchisee earns. This is the most common agreement method in the franchise business world.
3. Manufacturing Franchise
Through this agreement, the third-party manufacturer gets the rights to manufacture and distribute the products under the franchisor’s name and trademark. This agreement is mainly used in manufacturing companies like Hyundai, Nestle, etc.
4. Master Franchise
Through a master franchise agreement, the franchisee attains the rights to control the franchising activities from the respective franchisor. In some cases, this is limited to a specific geographical area, like a city or a country.
The master franchisee has exclusive business rights to the specified territory, which inhibits any kind of interference from other market players selling the same brand’s product. This whole agreement eventually leads to an easier and better return on investment for the franchisee, as he gets access to the entire geographical area with no hindrance.
Financial Aspect Of Franchise Business Model
As discussed, famous brands worldwide work on this business model and somehow deliver the same product to different corners of the world. How does it work? This is the question that comes into an average person’s mind very often. But don’t worry, we are here to answer it for you.
The business model is very simple. The franchisee purchases the rights to use the brand’s trademark and products. But in addition to that, the franchisee has to make sure that the original quality of a product is not diminished or changed in any way; otherwise, it might affect the brand’s name.
This is done through the special training and operational guidelines provided by the franchisor, which are necessary to be followed according to the contract. On the other hand, the franchisor also gets a royalty fee, which is a percentage of the recurring revenue earned by the franchisee. Likewise, the franchisee gets the benefit of brand loyalty from its customer and makes a profit using the franchisor’s trademark.
How To Get Into The Franchising Market?
Just like any other business market, the franchise market involves specific steps which must be taken in order to buy and operate a franchise of a renowned trademark. These steps may vary on the basis of an agreement, but the mainstream points are as follows:
1. Study The Market
First and for all, you need to conduct some background information regarding what kind of business franchise you are looking forward to venturing into. The franchisee needs to have information as well as expectations of what they are buying themselves into.
Conducting a study of the market helps you get in touch with the franchisors with whom you would be interested in investing. In addition to that, make sure to get in touch with the legal bindings associated with the respective industry. This allows you to get a better insight into the dos and don’ts of the business.
2. Approach The Franchisor of Your Choice
Reaching out to the franchisor helps you get on their list of potential franchisees. Moreover, a physical meeting with the business representatives enables you to get a better insight into the business plan and its potential. All these aspects help you get a better understanding of a brand that you will be representing in the future.
3. Contract Negotiation
A business is all about negotiation. It’s all a matter of how well you are able to achieve a perfect output from a relationship with your franchisor without violating each other’s respect and your personal gains. This stage is quite complicated; you need to have exquisite negotiation skills and a certain overview of the market in order to turn the odds in your favor.
4. Signing The Final Agreement
After finalizing the contract, an agreement is signed between the two parties, i.e., the franchisor and the franchisee. Mostly a legal expert is hired to help you get through all the legal bindings and to ensure that the agreement is according to the contract negotiated in the earlier stage. Furthermore, it is highly suggested that both parties go through the final deal thoroughly, so that there are no ambiguities in the agreement.
What Are The Advantages Of Franchising?
Franchising is often considered a safer alternative than initiating a start-up from scratch. This is owed to a number of benefits that come through buying yourself an already-established trademark. Brand loyalty, demand, established business models, and properties help a franchisee be a part of a successful venture.
1. Reduced Risk Factor
The risk factor involved in starting a new business venture, such as a start-up, is considerably higher than that of buying yourself into a company. Usually, start-ups require a hefty investment with no return rate guarantee. This investment might sink through a failed start-up. On the other hand, the franchisee is entirely aware of the franchise fee and the royalty fee associated with the agreement, which helps them lock their investment in safe hands with a high return value.
2. Brand Recognition
Brand recognition plays a significant role in the franchising business model. The whole business model revolves around scaling a brand to reach all customers. This allows the franchisee to gain access to the customer base and deliver their favorite brands and products under the franchisee’s supervision. However, the product, service, and delivery remain unaffected to maintain customer loyalty.
3. Utilizing An Existing Market
The franchisor has already strived to create a demand for their product in the specific market. All the marketing and brand attractions have already positioned the brand in the minds of its customers. The franchisee, through the same brand, gets the chance to utilize the market in their region and reach brand customers. On the other hand, if someone has started their own business, they would have gone through all the initial steps to excel in that business market and create a demand for their product.
4. Support From Franchisor
In a business format franchise agreement, the franchisor provides all the help and guidelines needed by the franchisee to attain the brand’s satisfaction level. In the early stages, proper training is also provided by the franchisor to train staff and managers of a franchise. In another case, if you decided to start your own venture, you would need this support from third-party consultants, which all adds up to the expenses of the business venture.
Economic Outlook Of The Franchising Business
The franchising business has seen a huge growth in the year 2021 and is even expected to break previous records in the fiscal year 2022. Most of the credit for this growth goes to the sharp contraction in 2020. The renormalization after this contraction served as the basis of an economic rebound of around 788 billion dollars in 2021.
We expect the franchising business to continue trending upwards in 2022 while breaking all the previous records. Just in 2021, the number of franchise employees increased by 8.2%, attracting employees with great benefits, job security, and career advancement. In the coming year, the franchise business is likely to grow about 5%, making it a whopping $826 billion, even surpassing the 2019 levels.
Although as the economy stabilizes, the growth will eventually slow down and stabilize. However, even at that rate, the franchisors would be able to add a couple of hundred thousand jobs in the market every year in the US alone. It is also anticipated that the number of franchised establishments will increase by 2%, surpassing the rate in the pre-covid era.
The geographical location has a lot of effect on franchises’ rate of growth. If rightly implemented, the economic outlook for the franchising business model is going nowhere but upwards in the coming years with a high success rate. However, the locations, market demands, and migration trends will determine if the success rate is impressive or satisfactory.
Optimal Way To Scale Your Business
We have talked about various advantages of the franchising business model for a franchisee, but what motivates a brand to sell its franchises to other individual businesses? The phenomenon is pretty simple and can be put into a single word, “scalability. “
Franchising allows the brand owner to scale and expand their business exponentially. Reaching a new customer base and attaining brand loyalty through the trademark helps them create an extensive demand for their product.
However, then comes the question of starting a new branch on their own. Starting and operating a newly established branch involves a hefty investment along with time consumption.
Through the franchising business model, the brand can expand without any limitations. They earn through the license fee and ongoing royalties, during which both the franchisor and franchisee benefit from this business model.
In order to get a finer look at how successfully a business can franchise its trademark, take a glimpse at some of the most common franchises in the world.
- Hilton Hotels & Resorts
Disadvantages Of The Franchise Business Model
It’s an optimal way of buying yourself into a business and representing a successful trademark. However, there are certain cons associated with this business model too.
1. Franchise Regulations
The franchise agreement usually contains restrictions on how you can run the business. You might be able to negotiate some aspects in your favor, but still, you would have to comply with company regulations and restrictions.
2. High Franchise Fee
The leading franchises of the world have a waiting list of years. However, if you somehow manage to get accepted, the costs might be higher than you expect. The license fees are usually pretty expensive. In addition, you also have to pay continuing management service fees, and you may have to buy products from the franchisor.
3. Difficulty In Reselling
It might be difficult for you to sell your franchise to another individual business owner. Usually, franchise agreements don’t allow such changes in ownership. However, if they do allow it, the potential buyer has to be approved by the franchisor before he is handed the reigns of the franchise.
4. Inflexible Nature
The inflexible nature of a franchisor may cause restrictions on your creative freedom. After all, you are running someone else’s business, so they need to be in accordance with every key aspect of the franchise. These aspects may diminish the potential to make changes according to the market response.
How To Choose The Right Franchise For Yourself?
Franchises are available in almost every industry. However, if you are looking towards buying a franchise, their several factors that must be addressed in order for you to strategize your buying decision and individual business plan completely.
Here are some things that you are required to clear before pursuing the franchise business market:
1. Personal Motive
Everybody has a different passion for the industry. Determining your personal motives help you understand what kind of business you want to get into. If you want to make money while staying at home, you can’t be a manager of a trademark. So, these are some things that need your attention before taking an entrepreneurial step in your career.
2. Industry Sector
The word franchise is not only related to the food and beverage industry. Most of the leading car companies like Hyundai and Ford also work on franchise business models, and they earn significant profits from it. If you are someone with a passion for the automotive industry, you wouldn’t want to run a fast-food franchise, would you? That’s why you need to ask yourself a question “what type of industry would I like to conduct business in?”
3. Investment Budget
Without investment, you can’t get a franchise license from the franchisor. So, the investment budget plays a great role in categorizing the franchises of your choice. Franchise costs vary by industry. It can range from as low as $10,000 to upwards of $1 million. You need to compare the initial investment with the rate of return before buying a franchise; this will help your buying decision.
4. Mutual Expectations
The franchise agreement should be mutually agreed upon with both parties content with it. Any ambiguities in the contract can lead to a conflict of interest and can damage the franchisor/franchisee relationship. So you should be clear about what your potential franchisor expects of you so that you can sustain a long-lasting relationship.
The trend of the Franchising business model guarantees that this industry has normalized after the pandemic and is going nowhere but up and away. Through this business model, both the franchisor and franchisee benefit in various ways and both parties boost the scalability of the business trademark.
The considerable increase in the brand’s customer base allows the brand’s product to reach customers in other parts of the world with the same properties, qualities, and attributes. Thus, making it a perfect way to start or expand your business based on the franchising business model. Almost all famous brands have gone international by selling franchises and have scaled their business all over the world.