The franchise business model is often chosen by people who want to start a business but aren’t sure how to begin. Franchising allows you to buy into an established brand with a proven business system. Essentially, you are purchasing a brand along with its processes. Since the business model is already tested, you don’t have to start from scratch. You invest in a business that’s already running and apply its operations to your chosen location. For the franchisor, the benefit is expanding their brand without the need to open new outlets. Instead, they license their products or services to other locations, increasing their market presence.
What is the Franchise Business Model?
The franchise business model is built on a relationship between two parties: the franchisor and the franchisee. The franchisor owns the rights to the brand, while the franchisee pays a fee to use the franchisor’s name and operating systems. This partnership works based on mutual understanding and support. Here’s a breakdown of each party’s role:
The Franchisor:
– Sells the rights to use their brand.
– Develops the business operations.
– Provides a recognizable brand name.
– Offers training and support.
– Creates marketing strategies.
– Sometimes helps with site selection and structure.
The Franchisee:
– Pays the franchisor an initial or ongoing fee (royalty).
– Operates the business based on a contract.
– Acts as a branch of the franchise.
– Benefits from an established customer base.
– Gains from the brand’s reputation.
– Uses a ready-made business system.
– Manages day-to-day operations.
A Brief History of the Franchise Business Model
The franchise business model has been around for centuries. It can be traced back to the Middle Ages and ancient China, where landowners allowed people to conduct business on their land in exchange for a fee or commission. In modern times, one of the earliest examples is Benjamin Franklin’s agreement with Thomas Whitmarsh in 1731 to provide printing services in South Carolina. Isaac M. Singer later used franchising to distribute his sewing machines in the 1800s. However, the model gained widespread popularity with the rise of McDonald’s in the mid-20th century. Today, franchises are a global phenomenon, with thousands of businesses operating under this model worldwide.
Types of Franchise Business Models
There are two main types of franchise business models:
Product Distribution Franchise:
In this model, the franchisor manufactures the product, and the franchisee sells it. It resembles a supplier-dealer relationship, but the franchisee can only sell the franchisor’s products. Examples include John Deere and Ford Motors.
Business Format Franchise:
This is the most common model, where the franchisee not only uses the franchisor’s brand but also gains access to marketing strategies, operations systems, and ongoing support. Examples include Dunkin’ Donuts and McDonald’s.
Advantages of the Franchise Business Model
For the Franchisee:
– Brand recognition.
– Expert training and support.
– An established customer base.
– Access to proprietary technology.
– Help with choosing a location.
– Operational guidance.
– Marketing and advertising support.
– A network of fellow franchisees.
– Faster business launch.
For the Franchisor:
– Rapid brand expansion through franchisee investment.
– Growth without losing control.
– Steady revenue stream.
– Lower operational costs.
Disadvantages of the Franchise Business Model
The downsides of franchising often affect the franchisees. They may experience limited control over how they run their business. National or regional promotions might not suit their local market. Startup costs can be high. Additionally, following the franchisor’s system doesn’t guarantee success. Franchising is not for everyone, and both sides must align on values, goals, and company culture. Like any partnership, both franchisor and franchisee need to share a long-term vision for mutual success.
The Future of the Franchise Business Model
Technology, especially artificial intelligence, will increasingly impact franchising. In many cases, AI will take over routine tasks, as seen in fast-food franchises that already use technology to handle customer orders. Franchises will continue to expand globally, entering new markets that were once inaccessible. Remote franchises are also growing in popularity, especially with the shift toward working from home, which accelerated during the COVID-19 pandemic.
