How Does the Franchise Model Differ from Other Business Models?

17/03/2019 18:00 | Start a business

franchise model differ

Originally posted on 01/09/2017. Updated on 17/03/2019.

Franchising can be a great way to start your own business. By partnering with an established business, franchisees benefit from their systems and existing customer base.

The popularity of franchising has grown massively in the UK in the last 20 years, according to the British Franchise Association. With over 900 British franchised brands now in operation and employing over 621,000 people in more than 44,000 franchised units, the future of franchising looks bright. The appeal of franchising can be attributed to the fact that both the franchisor and the franchisee benefit from the models success. This gives both parties incentive to work together and make the business flourish.

A franchise arrangement legally states that the owner of a business (the franchisor) permits a third party (the franchisee) to operate a business and distribute goods and/or services using their businesss name and systems in return for a fee. This franchise fee will take the form of an upfront payment, an ongoing payment based on profit made or a mix of the two.

Read more:

How The Franchise Business Model Works

It's worth appreciating the basics of franchising so you can decide whether it's right for you. So, lets look at how buying and owning a franchise differs from being a sole trader, partnership or limited company. Here are a few things to consider:

1. Access to a Proven Business Model vs. The Ability to Make Your Own Rules

When you buy a franchise unit, youll benefit from a proven business model and well-developed strategies that will help you make a profit from the get-go. In the UK, franchises must be able to demonstrate a defined method for trading and be considered a business format franchise, according to the British Franchise Association (BFA). A business owner who would like to become a franchisor must put their model to the test for at least a year, evaluating each activity, result and challenge to ensure that it is franchisable. Franchisees can then benefit from the winning formula and profitability of the franchise.

However, in return, franchisees must adhere to certain rules and regulations as set out by the franchisor in the franchise agreement. These can be restrictive for an entrepreneur who wants to run their business in their own way if you want to develop your own business ideas and systems, setting up your own business from scratch might be a better option for you.

2. Brand Recognition vs. Creativity

One of the main reasons why franchising is so popular is because franchisees immediately benefit from a recognisable brand. Reaching this same level of brand awareness could cost an independent business a significant amount of time, effort and money. Customers are far more likely to trust and use a business that is familiar to them, giving franchises an edge in the market.

This, of course, means that franchisees cannot significantly alter the existing branding and therefore miss out on the creative aspects of building a business from scratch. Logos, slogans and graphics will all have been developed before you come onboard, and you must represent the brand in accordance with its current image. Also, because creating an independent business involves a large amount of work, there is a sense of pride and excitement when hard work pays off. Processes such as the growth of brand recognition and the emergence of a loyal customer base give entrepreneurs the chance to reflect on their business journey. This act of building the brand is, to some extent, eliminated in the franchise model, which could result in slightly lower job satisfaction for franchisees.

3. Fees vs. No Fees

There are costs involved with any new business venture, which can be problematic and stressful for entrepreneurs trying to get their company off the ground. This is where franchising can help.

Firstly, the franchisor might offer to pay the initial franchise fee on your behalf, which is then paid back in instalments over time. Secondly, because youre buying a business with a proven franchise model rather than starting a totally new business, funding can be easier to obtain as youre seen by lenders as less of a risk. Also, specialist franchise advisors are provided by many banks, offering franchisees the opportunity to seek expert advice on their financing options.

Independent start-ups do not have access to a franchises support network, but while securing initial funds may be more difficult, there are also no royalties or other ongoing fees to pay. Such fees can impact a franchises profit in the early days, so avoiding these regular payments can be beneficial for a sole trader or limited company.

Franchise Business Model Example - McDonalds Franchise Business Model

Lets look at an example of a successful franchise model. Where better to start than the top foodservice brand in Europe McDonalds. This business truly relies on the success of its franchisees. In the US, 90 percent of McDonalds outlets are operated by franchisees.

Investors who wish to start up a McDonalds franchise must be prepared to invest at least $500,000 and this capital must not be borrowed. Taking all costs and franchise fees into account, the total budget needed to open a new franchise is between $1 and $2 million. Franchisees should also pay monthly service fees (4 percent of monthly sales) and rent. In return, franchisees will receive exhaustive training that lasts 12-18 months and is undertaken on a part-time basis, ensuring they are fully equipped to represent the McDonalds brand.

Conclusion

There are far more advantages to franchising that are outlined in these three points. Franchisees benefit from training and support from the franchisor and a sense of security when they begin franchising. The franchise model provides a safety net if things should go wrong, but 97 percent of franchises are profitable, according to the BFA. While the success of any new business can never be guaranteed, the established business model and high level of support provided by franchises mean that franchised units have a much smaller chance of failing than an independent start-up.

However, franchising isnt for everyone and, ultimately, the decision to buy a franchise might be determined by your personality type. If you find it difficult to hand over control to a third party or dislike the idea of paying royalties and ongoing payments to a franchisor, then the franchise model probably isnt for you. However, if you crave stability, brand recognition and an established set of practices, franchising could offer you the benefits of starting a new business without the anxiety that independent start-ups can bring.

Once youve decided that franchising is for you, its time to start conducting extensive research into the franchises out there. Franchises are available in a huge variety of sectors, from food and retail to technology, home care and travel, so there is bound to be something suitable for each and every prospective franchisee.

Other recent articles
Did you enjoy this article? Please rate this article
Average rating (4.5/5) based on 1 vote(s)

0 Comments

post a comment

Characters remaining: 250