The Franchising Model

What is the Franchising Model?


The franchising model involves granting individuals or entities the right to operate a business under an established brand, following a proven business model and set of guidelines, in exchange for franchise fees and ongoing royalties. Franchising allows for rapid business expansion and market penetration while leveraging the local knowledge and resources of franchisees. However, it requires maintaining brand consistency, providing support and training to franchisees, and managing the relationship between the franchisor and franchisee.

Key Features

The franchising model focuses on generating revenue through franchise fees or royalties. Here are the key features of the franchise business model:

Brand & Trademark

The franchising model involves granting the right to operate a business under an established brand name and trademark. Franchisees benefit from the brand recognition and reputation built by the franchisor, which can provide a competitive advantage in the market.

Business Systems

Franchisors provide franchisees with a proven business system and operational guidelines. This includes standardised processes, procedures, and training materials to ensure consistency. This
pre-established system helps franchisees replicate the successful operation of the business.

Support & Training

The next key feature is its distribution and supply chain management. This involves establishing distribution channels, partnering with retailers or wholesalers, managing inventory, and ensuring timely delivery of the product to customers.

Financial Relationship

The franchising model involves a financial relationship between the franchisor and franchisee. Franchisees typically pay an upfront franchise fee and ongoing royalty fees or a percentage of sales to the franchisor in exchange for the right to use the brand and business system. 

Market Exclusivity

Franchise agreements often include provisions for territorial or market exclusivity. This means that franchisees have the right to operate within a defined geographic area, protecting them from direct competition with other franchisees of the same brand. 

Franchise Agreement

The franchising model is governed by a legally binding franchise agreement. The agreement outlines the rights and obligations of both parties, including the terms of the franchise relationship, operational requirements, fee structure, intellectual property usage, and termination provisions. 

Advantages & Disadvantages

The franchise model offers businesses the opportunity to expand their brand presence and revenue by granting individuals or entities the right to operate under their established brand and business system.  However, franchisors face challenges in maintaining brand consistency across multiple locations, ensuring franchisee compliance, and balancing the need for control with the franchisees' autonomy.

Pros

Rapid Business Expansion

Franchising allows for rapid business expansion without the need for significant capital investment by the franchisor. Franchisees bear the costs of opening new locations, enabling the brand to grow quickly and reach a wider customer base.

Brand Consistency

Franchising promotes brand consistency across multiple locations. Franchisees follow established operational standards and guidelines, ensuring that the brand image, customer experience, and product/service quality remain consistent across the franchise network.

Brand Recognition

Franchising allows for the expansion of a recognised and established brand. Customers may already be familiar with the brand and have positive perceptions, which can facilitate the success of new franchise locations and attract a loyal customer base.

Shared Risk & Investment

Franchisees share the financial risk of operating the business, including startup costs and ongoing expenses. This allows the franchisor to expand its brand with lower financial risk compared to opening and operating company-owned locations.

Economies of Scale

Franchise networks can benefit from economies of scale in purchasing power, marketing efforts, and operational efficiencies. By leveraging the collective size of the franchise system, franchisees can access cost savings and competitive advantages that may not be available to individual businesses.

Motivated Network

Franchisees are typically motivated and invested in the success of their franchise. As independent business owners, they have a personal stake in the performance and profitability of their location, which can drive their commitment, dedication, and entrepreneurial spirit.

Local Market Expertise

Franchisees bring valuable local market knowledge and expertise. They understand the preferences, needs, and cultural nuances of their specific market, which can contribute to the success and adaptation of the business in different locations.

Local Customer Relationships

Franchisees often have strong connections and relationships with local customers. This local presence and personalised approach can enhance customer loyalty and help the business adapt to local market needs and preferences.

Growth Potential

The franchising model offers significant growth potential, both domestically and internationally. Franchisees can help penetrate new markets and expand the brand's footprint, driving increased revenue and market share.

Centralised Support & Training

Franchisors provide comprehensive support and training to franchisees. This includes initial training programs, ongoing operational guidance, marketing support, and access to proven business systems and strategies. Franchisees benefit from the expertise and resources of the franchisor.

Cons

Performance Variability

Franchisee performance can vary significantly, and not all franchisees may achieve the same level of success. Differences in management capabilities, commitment, and adherence to operational standards can impact the overall performance of the franchise network.

Maintaining Consistency

Ensuring consistent brand image, product/service quality, and customer experience across all franchise locations can be challenging. Franchisors need to establish and enforce strict operational standards and guidelines to maintain uniformity and prevent any deviation from the brand's core values.

Shared Brand Reputation

The actions and performance of individual franchisees can impact the overall brand reputation. Negative experiences or poor service at one franchise location can reflect poorly on the entire brand, affecting customer perception and loyalty.

Upfront Investment

Franchisees are required to make upfront investments, including franchise fees, and ongoing royalty payments to the franchisor. These financial obligations can be a challenge for some franchisees, especially during the initial stages of the business when revenue may be limited.

Limited Control

Franchisors have limited control over the day-to-day operations of each franchise location. While they can provide guidelines and support, ultimate control lies with the individual franchisees. This lack of direct control can make it challenging to ensure consistent execution and quality across the entire franchise network.

Finding Quality Franchisees

Identifying and attracting qualified franchisees who have the necessary skills, resources, and commitment to run a successful franchise can be a challenge. Franchisors need to have a thorough screening and selection process in place to identify the right candidates who align with the brand's values and objectives.

Maintaining Relationships

Maintaining a healthy and cooperative relationship between the franchisor and franchisees is crucial. Franchisors must provide ongoing support, communication, and resolve any conflicts or disputes that may arise. Fostering a positive relationship is essential for the success and growth of the franchise network.

Legal & Regulatory Compliance

Franchising involves adherence to various legal and regulatory requirements, including franchise disclosure laws and regulations specific to each jurisdiction. Franchisors must navigate and comply with these laws to ensure legal compliance and protect the integrity of the franchise system.

Market Saturation

In certain markets, the saturation of franchise locations can lead to increased competition among franchisees. This can make it more challenging for individual locations to stand out and attract customers, especially if there are multiple franchise locations in close proximity.

Exit Strategy

Exiting or terminating a franchise agreement can be complex and subject to specific terms and conditions. Franchisees may face limitations on selling their franchise or exiting the business, potentially limiting their options for transitioning out of the franchise relationship.

Revenue Generation

The franchise model generates revenue primarily through franchise fees.
Here are some of the ways businesses could generate income through a franchise model :

Franchising Fees

Franchisors generate revenue through franchise fees, which are initial payments made by franchisees to acquire the rights to operate a franchise. These fees can vary in amount and are typically paid upfront or in instalments. 

Supply Chain / Product

Franchisors may generate revenue by establishing preferred supplier relationships and charging franchisees fees for access. These fees can help the franchisor negotiate better pricing and terms with suppliers, and they also contribute to the overall profitability of the franchise system.

Advanced Training

Franchisors may offer specialised training programs or workshops to franchisees for an additional fee. These programs provide advanced training on specific topics, such as sales techniques, customer service, or business management. Franchisees can opt to participate in these programs.

Royalties

Royalties are ongoing payments made by franchisees to the franchisor based on a percentage of sales or revenue. These royalties provide a consistent revenue stream for the franchisor and are typically paid on a regular basis, such as monthly or quarterly. 

Renewal & Transfer

When franchise agreements are renewed or transferred to new franchisees, franchisors may charge renewal or transfer fees. These fees cover administrative costs and allow the franchisor to generate revenue from the continued operation or transfer of franchise units.

Territory Expansion

If franchisees wish to expand their territory or open additional franchise units, franchisors may charge fees for granting these rights. Territory or expansion fees provide additional revenue for the franchisor when franchisees seek to grow their businesses within the franchise system.

Marketing Support

Franchisees are often required to contribute to collective marketing efforts. They may be required to pay fees or contribute a percentage of their sales toward campaigns. These fees support brand building & activities that benefit the entire franchise network.

Onboarding & Support

Franchisors may charge fees for initial training programs, ongoing support, and access to operational resources. These fees cover the costs associated with providing comprehensive training, field support, and continuous assistance to franchisees. 

Audit & Compliance

Franchisors may conduct periodic audits to ensure franchisees are operating in compliance with the franchisor's standards & guidelines. Any discrepancies or violations discovered during the audit process may result in financial penalties, fees, or required corrective actions.

Customer Acquisition

Customer acquisition in the franchising model is driven by a combination of the franchisor's marketing efforts and the local marketing efforts of individual franchisees. The franchisor provides comprehensive marketing support, including national or regional advertising campaigns, brand development, and promotional materials.

Local Marketing & Advertising

Implementing targeted marketing and advertising campaigns at the local level to create awareness and attract customers to individual franchise locations. This can include local print ads, radio spots, billboards, and digital marketing strategies specific to the franchise's target market.

National & Regional Marketing

Investing in national or regional marketing campaigns that promote the franchise brand as a whole and drive customer awareness and interest. This can involve TV and radio advertising, digital marketing campaigns, or participation in industry events and trade shows.

Franchise Development Websites

Building and maintaining franchise development websites that provide comprehensive information about the franchise opportunity, including franchisee testimonials, investment requirements, and available territories. These websites serve as a platform to attract potential franchisees who can then bring in customers through their local operations.

Franchise Discovery Days

Organising franchise discovery days or events where interested individuals can learn more about the franchise opportunity, meet with franchisors, and gain insights into the business model. These events help in acquiring qualified and motivated franchisees who can drive customer acquisition in their respective territories.

Franchisee Referrals

Encouraging existing franchisees to refer potential franchisees who have a strong entrepreneurial spirit and align with the brand's values. Franchisees can leverage their networks and personal connections to identify individuals who may be interested in joining the franchise system.

Franchisee Training & Support

Providing comprehensive training and ongoing support to franchisees to ensure they have the necessary skills and resources to effectively acquire and retain customers. This can include marketing training, access to marketing materials, and guidance on local marketing initiatives.

Strategic Partnerships

Forming strategic partnerships with complementary businesses or industry influencers that can drive customer acquisition for the franchise. These partnerships can involve co-marketing initiatives, cross-promotions, or joint advertising campaigns that target a shared customer base.

Local Community Engagement

Encouraging franchisees to actively participate in local community events and initiatives to build brand visibility and establish relationships with potential customers. This can involve sponsorships, community outreach programs, or participation in local trade shows or fairs.

Online Presence & Reviews

Maintaining a strong online presence through the franchise's website, social media channels, and online review platforms. Optimising online listings, encouraging customers to leave reviews, and engaging with online communities can help in attracting and acquiring customers who research and make purchasing decisions online.

Customer Loyalty Programs

Implementing customer loyalty programs that incentivise repeat business and referrals from existing customers. These programs can include rewards, discounts, or exclusive offers that encourage customers to continue patronising the franchise and refer others to do the same.

Implementing the Franchising Model

When considering the franchising model, businesses need to take into account the following:

Key Considerations

Franchisee Selection

Ensuring the selection of qualified and capable franchisees who are aligned with the brand's values, goals, and operating standards. Conducting thorough background checks, assessing financial stability, and evaluating their experience and commitment to the business.

Franchisee Agreements & Contracts

Developing comprehensive franchise agreements that clearly define the rights, responsibilities, and obligations of both the franchisor and franchisee. Including terms related to franchise fees, royalties, intellectual property usage, territorial rights, training, support, and ongoing communication.

Brand Protection

Maintaining consistency in brand image, product or service quality, and customer experience across all franchise locations. Implementing quality control measures, conducting regular inspections, and enforcing compliance with brand standards and operating procedures to protect the brand's reputation & maintain customer trust.

Territory Management

Determining the geographic territories or areas where franchisees can operate to avoid competition and ensure market exclusivity for each franchisee. Establishing clear boundaries and guidelines for territorial rights and defining any limitations or expansion opportunities within the territory.

Legal & Regulatory Compliance

Adhering to all relevant legal and regulatory requirements at local, regional, and national levels. Ensuring compliance with franchising laws, intellectual property rights, consumer protection regulations, and other applicable laws and regulations.

Franchisee Fees & Royalty

Establishing fair and reasonable franchise fees and royalty structures that provide adequate returns for the franchisor while considering the profitability and success of franchisees. Communicating the financial obligations and payment terms to franchisees transparently.

Training & Support

Providing extensive initial and ongoing training programs to franchisees to ensure they have the necessary knowledge and skills to operate the business successfully. Offering continuous support, guidance, and resources to franchisees, including marketing assistance, operational support, and access to established systems and processes.

Relationship Management

Building and maintaining strong relationships with franchisees through effective communication, regular meetings, and ongoing support. Addressing franchisee concerns, resolving conflicts, and fostering a collaborative and mutually beneficial partnership.

Continuous Improvement

Encouraging franchisees to provide feedback and suggestions for improving the franchise system, operational processes, and customer offerings. Embracing innovation and staying updated with industry trends to enhance the franchise model and drive continuous growth.

Exit Strategy

Planning for potential franchisee exits or transfers, including provisions for resale, buy-back, or succession planning. Establishing clear guidelines and procedures for franchisee transitions to ensure a smooth transfer of ownership and minimise disruptions to the business.

Growth Strategies

Network Expansion

Actively seeking opportunities to expand the franchise network by identifying new markets, both domestically and internationally, where the brand can be successfully introduced. This may involve targeting specific regions, cities, or countries with high market potential and demand for the franchise concept.

Franchisee Recruitment

Implementing effective franchisee recruitment strategies to attract qualified and motivated individuals who have the potential to become successful franchisees. This includes targeted marketing, advertising, networking, and actively engaging with potential franchisees to showcase the benefits and opportunities of joining the franchise network.

Branding & Marketing

Developing and implementing comprehensive marketing and branding strategies to increase brand visibility, attract customers, and promote the franchise network as a whole. This may involve national or regional marketing campaigns, digital marketing efforts, social media presence, public relations activities, and collaboration with franchisees on local marketing initiatives.

International Expansion

Exploring opportunities for international expansion by entering new global markets where there is demand for the franchise concept. This may involve adapting the business model to suit local market conditions, complying with international regulations, and establishing strong relationships with local partners or master franchisees.

Standardising Operations

Continuously improving operational efficiency and standardising processes across the franchise network to ensure consistency and quality in product or service delivery. Implementing best practices, operational guidelines, and training programs to enable franchisees to replicate the proven success of the business model.

Product & Service Innovation

Continuously innovating and expanding the product or service offerings to meet evolving customer demands and stay ahead of competitors. This may involve introducing new products or variations, improving existing offerings, or exploring new market segments to expand the franchise network's customer base.

Support & Training Programmes

Enhancing the support and training programs provided to franchisees to equip them with the knowledge, skills, and resources necessary to operate a successful franchise unit. This may include ongoing training sessions, access to online resources and tools, mentoring programs, and regular communication channels to address franchisee needs and challenges.

Strategic Partnerships

Forming strategic partnerships or alliances with other businesses or organisations that can complement the franchise concept and provide additional growth opportunities. This may include co-branding initiatives, collaborations with suppliers or industry influencers, or cross-promotions to expand reach and attract new customers.

Continuous Feedback Loops

Encouraging open communication and feedback from franchisees to identify areas for improvement and innovation within the franchise system. Regularly reviewing and updating operational processes, training materials, marketing strategies, and support mechanisms based on franchisee feedback and changing market dynamics.

Franchisee Performance

Prioritising franchisee success and profitability as a key driver of overall franchise network growth. Monitoring and analysing franchisee performance metrics, providing performance incentives, recognising top-performing franchisees, and offering ongoing support to underperforming units to ensure their success and contribute to the overall growth of the franchise network.

Suitable Industries

The franchising model is applicable to a wide range of industries, including
food and beverage, retail, hospitality, fitness, education, and more.

Food & Beverage

Retail

Hospitality

Fitness & Wellness

Education

Automotive

Healthcare

Home Services

Professional Services

Companies Using The Product Model

Business-to-Consumer (B2C)

McDonalds

McDonald's operates its fast-food restaurants through franchisees who pay for the rights to use the brand, systems, and recipes.


Subway

Subway uses the franchising model to expand its sandwich chain, allowing independent franchisees to operate their own Subway restaurants.


Anytime Fitness

Anytime Fitness is a fitness franchise that grants individuals the opportunity to own and operate their own gyms under the Anytime Fitness brand.

Business-to-Business (B2B)

FastSigns

FastSigns is a franchise company that specialises in providing visual communications and signage solutions to businesses. 


UPS Store

The UPS Store is a franchise company that offers a range of business services, including shipping, printing, and mailbox services. 


ServiceMaster Clean

ServiceMaster Clean is a commercial cleaning franchise company that provides businesses with professional cleaning services.