As an entrepreneur, you can confirm that starting a business from scratch is not a walk in the park. The journey comes with a lot of hurdles and challenges. First, you need to build and establish your brand. Next, you must put operational systems in place. Also, developing your products and services and introducing them to the market is another challenge.
These issues make it hard for many new businesses to survive beyond five years. Fortunately, you do not need to do all the above tasks. You can become an entrepreneur without starting from scratch. This is possible through franchise business model application.
In this article, we cover what the franchise business model is, how it works, as well as its pros and cons. So, let’s get started and read through together!
What is Franchise Business Model?
A franchise business model is where you pay an initial fee to an established business to use its brand name, strategies, and systems. You benefit from its recognized brand and operate your business by this company’s rules and standards. This aspect guarantees you a quick return on your investment.
In return, the brand gets a percentage of your sales revenue. You get support through training, market research, and the provision of business systems. So, it comes with a win-win situation for you and the brand owner. But how does the franchise business work?
How Does Franchise Business Model work?
The franchise model is not a complicated aspect. This model involves two major parties which are the franchisor and the franchisee. Franchisors are corporate brand owners. This party allows entrepreneurs to own and operate businesses using their brands, systems, and strategies. In other words, they become the umbrella for different entrepreneurs running businesses under the company’s brand. The franchisor offers ongoing support to the new businesses and all of you to sell their services and products.
The franchisee is the next party in this model. Franchisees are entrepreneurs that want to own businesses but lack enough capital to start from scratch. For this reason, they approach an established brand for a partnership. This relationship allows them to sell the brand’s products and services following all the quality, design, business strategies, and operational systems. The franchisee pays an initial fee and follows the required rules for engaging in a relationship with these brands.
As well, they pay a percentage of their returns to the corporate brand and benefit from ongoing support. So, the franchise business model offers a win-win situation for the two parties.
Examples of Franchise Model Businesses
In this decade, many established brands seeking to expand are opting for a franchise business model. The approach is helping them to partner with upcoming entrepreneurs seeking to run a business under their brands.
MacDonald’s is a good example of a franchise business. This reputable fast-food company partners with entrepreneurs seeking to run MacDonald stores in given cities or towns. The entrepreneur needs to have the required investment and ready to undergo a nine-month training. The training involves learning how MacDonald’s operate, their business strategies, production rules, and quality standards.
Taco Bell, Subway, Domino’s, Pizza Hut, and other leading fast food restaurants are other examples of franchise businesses.
Pros and Cons of the Franchise Business Model
The franchise model is a shortcut to entrepreneurs with the desire and determination to run businesses but lacks enough capital. But like other business models, it has a number of benefits and shortcomings. Here they are:
Pros
Support from the franchisor
No doubt, start a business from zero is tricky. You face many challenges particularly when you do not have any prior experience. The franchise model saves you from all these troubles. When you join the franchise partnership, your franchisor provides ongoing support to help you get your feet on the road.
The franchisor takes care of the legal requirements, connects you with suppliers, and offers the needed training to kick off your venture. This support helps you to run a successful business even though you have little or zero experience.
High business success rate
Many new businesses fail within the first six months to three years. The challenges of building their brand are the major reason why they do not succeed. When it comes to franchises, there is a high success rate. The new business uses an already established brand name.
Also, they offer known products and services. Hence, unlike the ventures starting from scratch, franchisees do not struggle to establish themselves in the market. Ease of accessing credit
Low marketing cost
As noted, franchisees run their ventures under established brand names. You provide products and services that the users have knowledge about. Also, the franchisors allow you to use their systems and business strategies to reach out to the customers.
As such, you do not need to spend months or years trying to establish loyalty and trust from customers. You launch the market and start earning returns from it. So, you spend little to zero cost on marketing.
Cons
Profit sharing
The desire of every entrepreneur is to make a profit and take the whole package home. But this is not the case with the franchise. One of the agreement terms is the payment of a royalty fee. You will need to pay a given percentage of your profits to the franchise. The rate can range from 4% to 20% of the annual returns. As such, you have to share your profits with your franchisor.
No brand control
Independence is critical for every entrepreneur. You want to control your brand and have a say in whatever happens to it. In the franchise business, your success relies on the brand reputation. If the brand suffers a bad reputation, it will affect your sales.
Also, you face limitations on the products or services you can offer. You cannot add items that your franchisor does not offer or introduce them on your menu without the approval of the franchisor.
Conclusion
In a word, starting a business from scratch can be a challenge for many entrepreneurs. You have to create your products and services, brand yourself, and develop business strategies. Only a few startups achieve this goal.
With a franchise business model, you do not need to struggle with all these issues. You work as a branch of an established brand. So, your chances of success are high. However, you have zero control of the brand, and sharing of profit in form of loyalty fees is a norm.
