The Franchising business model

The franchisor’s rationale

If a business involves a network of branches, it can be built much faster and grow to be much larger than if the franchisor had to provide its own capital, staff and management for each branch. In effect, the franchisees provide the capital, staff and management, at their cost and their risk, to grow the franchisor’s business. In this way, the franchisor receives money from the franchised businesses both as initial franchise fees and ongoing payments, without risking its own capital.

Essential requirements to establish a successful business as a franchisor include:

• • a brand or trade mark sufficiently well known to have the power to attract customers;
• • a business system which can be used as a template to reproduce substantially identical businesses in different locations, such as a restaurant selling specific types of food under a well-known trade mark. However, service businesses may also be successfully franchised if they have a well-known brand and a system for attracting customers and providing services; and
• • the resources to facilitate the establishment and conduct the franchised businesses, and to ensure that they are conducted successfully under the franchisor’s direction. A badly run franchised business can seriously damage the value of the franchisor’s brand.

The franchisee’s rationale

Running a business as a franchisee is ideal for a person with the capital and enthusiasm to run their own business, but without the experience and knowledge to do so. For example, a person retrenched from their employment with a lump sum, who is too old to find new employment, but too young to retire.

However, there are many unscrupulous companies ready to take franchise fees, but without providing a viable business. A potential franchisee should:

• • take a franchise only if associated with a trade mark sufficiently well known to attract business; and
• • check carefully that the business will achieve a reasonable return on investment. The figures supplied by the franchisor are a good starting point. However, it is essential also to communicate with existing franchisees, whose details are included in disclosure documents which the franchisor is obliged to provide before a franchise agreement becomes legally binding.

See The franchising business model.