What Makes the Franchise Business Model Different to Others?

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Table of Contents

• What is the franchise business model?
• Advantages of the Franchise Business Model
• Disadvantages of the Franchise Business Model
• How Does The Franchise Business Model Compare To Others?
• Key Takeaways
• Frequently Asked Questions

Franchises are everywhere and are often quite well-known. Therefore, it is essential that you as a business owner understand what a franchise is and what makes the franchise business model so special. 

This article will unpack some of the qualities of a franchise business model and then will compare this model to other business models. 

What is the franchise business model?

To explain the franchise business model, let’s go through the steps in setting up a franchise. 

1. A business has a brand or system that they want to expand.
2. Franchisees who want to own that franchise pay the franchisor fees to use their IP and systems.
3. After paying the initial franchise fee, the franchisee uses the IP and systems and keeps the profits that they make from the franchise.
4. Franchisors generate revenue through the initial and ongoing fees that the franchisee pays them.

As such, your franchisees run the day to day operations of the business. Whereas, you, the franchisor who sold them the franchise, have control over the guidelines, marketing and brand of the franchise.

Advantages of the Franchise Business Model

There are advantages and disadvantages of the franchise business model. Some of the advantages include:

1) Franchisees invest the money into starting the location. 

Franchisees pay the initial franchise fee and ongoing fees. However, franchisees also pay fit-out fees, costs relating to the lease and any legal costs. Therefore, your upfront financial risk as the franchisor is not significant. 

2) Franchisees are Motivated to Perform Well 

Unlike employees, your franchisees have a financial stake in the business. Consequently, your franchisees have an incentive to turn a profit and maintain high-quality standards.

3) Franchising Allows for Expedient Brand Growth 

Since you are not constrained by your personal and financial capacities, it is easier and quicker to expand your business. Under the franchising model, your franchisees invest their personal and financial resources into the business. You as the franchisor however, take more of a managerial-responsibility role in regard to the franchise’s development. Your franchisees are the ones responsible for the daily operations of the business which can be cumbersome. These matters include the customer service, recruitment of team members and payment of bills.

4) Retention of Greater Control Over Your Business

Despite handing over a lot of responsibility to your franchisees, you do have a substantial level of control over the individual franchises. You as the franchisor are still responsible for matters such as the training of team members. As the franchisor, you also still have the final word on the fit-out and decor of the individual franchises. Crucially, you also have control over the marketing plans and business systems.

Disadvantages of the Franchise Business Model

There are, however, notable disadvantages to the franchise business model. 

1) No Full Control Over Your Business 

Ultimately, you do not have complete control over your business anymore. You cannot run the daily operations of the business in every location. You need to place a level of trust and responsibility in your franchisees.

2) Liability for Non-Compliance With Laws and Regulations 

Unsurprisingly, you need to comply with the law when running a franchise. As such, you will incur the costs for ensuring your franchise is compliant with any relevant laws and regulations. For example, you will incur the cost for the drafting of documents such as the Franchise Agreement. Additionally, you as the franchisor, are vicariously liable for your franchisees’ contravention of the law. For example, you will be vicariously liable if your franchisees contravene the Fair Work Act. 

3) Training and Managing Franchisees

As the franchisor, you are responsible for training the franchisees. Initially, you will have to train and educate your franchisees on how to run the business. Additionally, you must provide ongoing support to your franchisees, particularly if they are struggling.

Part of your responsibilities as franchisor also requires you to manage poorly performing franchisees. Your franchisees have a significant impact on your brand and reputation. As such, you have an incentive to ensure they are performing as expected. Although, you should incorporate a mechanism into the franchise agreement that allows you to terminate the franchisee. This mechanism can be particularly useful if the franchisee does not respond to your assistance. You will want to remove the franchisee before they can cause irreparable damage to your business’s brand. 

Overall, the franchise business model provides a good option for business owners to expand. 

How Does The Franchise Business Model Compare To Others?

Other business models that are similar to franchising include co-operatives and licences. 

1. Co-operatives

A cooperative structure is a legally incorporated entity designed to serve its member’s interests. Typically, they are based on providing goods and services to their members. Since members run the business, they operate quite independently with a lot of flexibility.  However, this means there is a lack of leadership. 

2. Licenses

A licence agreement consists of a business giving another person the right to use a product, trademark or service. There are typically no guidelines on how to use the licence. The licensee receives the right to use the brand without the licensor’s input. 

Therefore, there are other models for your brand to expand. It is worth comparing each business model to see how the franchise model fares. 

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Key Takeaways

Franchise business models are pretty unique. This model represents a great way to expand your business. Via a franchise business model your business can grow faster than it otherwise likely would have. Under this model, you can delegate the personal and financial responsibilities to another person. Also, unlike traditional business models, your franchisees, in contrast to employees, are inherently motivated to achieve business success. However, you also must provide ongoing training and support to franchisees. It must also be noted that you have less control over your business. There are also a lot of requirements that you as the franchisor have to meet. 

If you need help deciding whether to franchise your business, contact our experienced franchise lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page. 

Frequently Asked Questions