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Understand the Franchise Business Model

By: Dave Howell - Updated: 7 Nov 2010 | comments*Discuss
Franchise Information Franchise Business

A business model is a method by which an enterprise is set-up to sell goods or services to an end customer. The franchise information you receive from the franchisor will give details about how this will occur with your particular franchise business.

The business model itself describes the method by which the business will monetise its concept or unique selling point. Other examples include the subscription model used in publishing, the direct sales model used in television advertising and more recently the online auction model as popularised by eBay.

The franchise business model can trace its history back to the mid 1850s. The USA bought franchising to the rest of the world with high profile franchise businesses like Coca-Cola and roadside motels being classic examples.

The franchise business model

If you look closely at the franchise information you receive from the franchisor you will see that the unique aspect of the franchise business is that as the franchisee, you, in effect buying a ready-made business almost off-the-shelf. The attraction is that you don’t have to invent a new process or device, or spend years developing a concept and making a huge financial investment.

Franchise businesses are already tried and tested before they are offered to the open market to make an investment in. Always look closely at the franchise information to see how the franchise concept as a whole is performing. The franchise business model has a number of unique features that include:

Fast start up
The out-of-the-box concept of the franchise business means that a new franchise can be set up in some cases within days of the franchisee buying their license. Consult the franchise information about the set-up routine to ensure you are comfortable with this before making your investment.

Easy expansion
The franchise business by its very nature can be expanded almost infinitely depending on the size of the market the franchise sells to. Franchisors will look closely at the number of their franchises that are in any one territory, as too many could damage the overall profitability of their operation. You should also look at the franchise information to see how close other franchises are to your proposed operation. Getting a good return on your investment could hinge on your franchise being unique in your particular area.

No knowledge required
Some franchises require absolutely no prior knowledge of a market sector. The franchise business model includes full and comprehensive training for the franchisee. This isn’t always the case, but the franchise information will tell you if training is included in the price of the license.

Costs and payments
The franchise information you will be given when you make enquiries about becoming a new franchisee will illustrate the sometimes high cost of setting up a new franchise operation in a territory. The franchise business model includes a period where the business will operate at a loss. If the franchisee works hard within their franchise they will eventually move into profit.

The other side of the franchise business model is the payments that franchisee's have to make to the franchisor each year. It is very important to consult the franchise information about what levels of payment you have to make and when. This is one of the unique aspects of the franchise business model.

Control and development
As franchisee you will have a level of autonomy within your own business, but ultimately you are not the franchise owner. The franchisor maintains control over every aspect of the business you are running on their behalf. Look at the detail within the franchise information to make sure you are happy about this aspect of the franchise business model. You are in effect leasing the business from them. Again, this is a unique feature of the franchise business model.

Franchise model structure

The franchise business model is hierarchical. Generally speaking the franchise business consists of these levels:

  • Master franchisorThis is the overall owner of the franchise business. Often, the master franchisor will be the person or company that developed the franchise business idea and governs every aspect of their franchise business.
  • FranchisorThe franchisor is the person or organisation that you will have the most contact with, and will most likely purchase your franchise license from. The master franchisor will have a number of franchisors in territories across the world that sell the franchise business concept only in their specific territory.
  • FranchiseeThe last component of the franchise hierarchy is you the franchisee. When you buy a franchise license you can operate this in whatever business format you choose from sole trader to limited company. The level of risk in the franchise business will guide you to the right business format.

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