What you need to know about franchising in the time it takes to make your bed.
Just like making your bed, franchising your business is both systematic in process and personal to your tastes and preferences.
In this article, we’ll take you through what franchising is, what franchising business models look like and the considerations of franchising your business.
If you’re considering franchising your business, taking six minutes to read this article will help you sleep easier with your decision.
Franchising can be a great way to grow your business. It’s both a business structure and a business relationship.
The franchising business model involves the franchisor (the owner of the business) giving independent people (the franchisees) the right to sell their goods or services, as well as to use the business name and branding, for a fixed period.
As well as providing licensing rights to franchisees, the franchisor also provides organisational training, merchandising and management to the franchisees in return for a service fee. This fee usually comes in the form of a percentage of their annual turnover.
There are four standard business models for franchises. They include:
1. Retailer to Retailer
The ‘Retailer to Retailer’ model describes the relationship where the franchisor markets a service or product under a common name and standardised system, through a network of franchisees. Pizza Hut is an example of this model in action.
2. Manufacturer to Retailer
The ‘Manufacturer to Retailer’ relationship is where the franchisee (retailer) sells the franchisor’s (manufacturer’s) product directly to the public. This model is common for car dealerships or certified technology dealers, such as licensed Apple sellers.
3. Manufacturer to Wholesaler
The ‘Manufacturer to Wholesaler’ model is a relationship where the franchisee (wholesaler) has the right to distribute the franchisor’s (manufacturer’s) product. This is the model that Coca-Cola uses.
4. Wholesaler to Retailer
The ‘Wholesaler to Retailer’ model is the relationship where the franchisee (retailer) purchases products for retail sale from the franchisor (wholesaler). This model is typically used by car dealerships.
Is franchising right for you and your business?
Deciding whether franchising is the right avenue of growth for your business can be tricky.
Firstly, you should think about whether you have six essential elements to become a franchise. You can read more about those here.
You also need to consider the benefits and challenges when it comes to franchising. These include:
Access to better talent
Franchising is a great way to find talented, entrepreneurial people who would prefer to word hard for profit, rather than taking a salary. You also get to select who you take on as a franchisee.
Allows you to scale quickly
As franchisees take on much of the financial and managerial responsibility of building their own stores, it frees you up to keep building your business.
Less financial risk
As your franchisees pay to be a part of your business and provide most of the capital, you can grow the number of your locations without having to invest as much yourself.
Higher rates of success
Studies show that franchised stores tend to perform better than company-owned stores, so you’re more likely to get a higher return on a lower level of investment.
But there are a few challenges when it comes to the franchising business model. These include:
Less control over managers
You can’t tell franchisees what to do the way you can with employees. Franchisees are independent businesses and will value their autonomy.
This could cause some management issues.
Franchisors tend to make money by collecting a percentage of sales as a royalty for letting the franchisee use their operating system and branding, while franchisees make money from profit.
Anything that boosts sales but not profits will create conflict between you and the franchisee. For example, if you want to offer customers promotional discounts, franchisees may likely object as their profit margin will go down while your return remains the same.
Challenges working together
It can be difficult to get franchisees to work together.
While franchisees will profit from each other’s marketing efforts, that means that they’ll reap benefits from advertising paid by the franchise even if they don’t pay for it.
Of course, if all your franchisees do the same thing, you won’t be able to pay for the advertising in the first place, and all the franchises will suffer for it.
It’s a lot harder to innovate with franchising. Part of the problem is that you must convince all your franchisees to accept a new product or system innovation, instead of just putting the new idea in place on your own.
Obligations and responsibilities of franchisors
Franchising success relies on everyone involved trusting each other – a lot.
The franchisor needs to trust the franchisee to maintain the integrity of their brand, and the franchisee needs to trust the franchisor to lead the overall business strategy.
As a result, a Franchising Code of Conduct exists that binds both franchisor and franchisee to certain rights and responsibilities. These are maintained by the Australian Competition and Consumer Commission (ACCC) and the Franchising Association of New Zealand.
Top 3 takeaways
- Franchising is a business relationship in which the franchisor (the owner of the business) gives independent people (the franchisees) the right to sell their goods or service, as well as to use the business name and branding.
- The main franchising business model comes in the form of a retailer to retailer relationship. There are also three other common variation to this model, which include the manufacturer to retailer, manufacturer to wholesaler and wholesaler to retailer models.
- Franchising can help you access better talent, scale more quickly and take on less financial risk. But some challenges you might face include managing franchisees and getting them to work together, dealing with conflicts with your franchisees and difficulty innovating.
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