What is a Franchise Model?
A franchise model is a business organization where an individual may start a business that sells goods or services developed by another individual or company. Common franchises include retail outlets, restaurants, cleaning services, and other similar businesses. Franchises allow entrepreneurs to build a business based on the success of a time-tested business model. Starting or owning the franchise model often includes several advantages and disadvantages for entrepreneurs and business owners.
Starting a franchise model often provides entrepreneurs with copious amounts of resources and support from the franchise organization. Franchisors are not interested in giving a franchise model to someone who does not understand the business or cannot make wise decisions. These organizations often create extensive training programs for educating individuals on how to start and maintain a successful franchise.
Franchises also provide the benefit of low-cost economic resources or business inputs. Franchise organizations often use their purchasing power to generate positive business contracts or relationships with suppliers and vendors. These contracts often allow franchise organizations to use each franchise model in their system to purchase resources from one supplier below market prices.
Another important advantage of franchises is the ability for new franchisees to use standard marketing and advertising campaigns developed by the franchisor. These campaigns are often directed at specific target markets or demographic groups interested in the company’s products. While many franchisees may need to contribute some capital for these campaigns, it is often significantly less than the overall cost of creating a new marketing or advertising strategy.
Selecting a franchise model is often based on the popularity of the franchise’s products in the economic market. This popularity saves entrepreneurs and business owners the time and effort needed to educate consumers on how their company’s products meet consumer demand. A franchise’s products may also be more superior when compared to others offered in the economic marketplace.
A disadvantage to owning a franchise model is the inability for entrepreneurs and business owners to use creativity when promoting their business and producing goods or services. Franchise organizations often require franchisees to operate within specific guidelines according to the contractual agreements. Franchisors may also issue fairly specific compliance reviews to ensure each franchise is operating according to standard operating procedures.
Franchises may also include the disadvantage of negative perceptions from consumers in the economic marketplace. Entrepreneurs and business owners must be prepared to deal with these negative situations when buying into the franchise organizations system. Although the individual franchise may operate according to standard outlines and using a strong ethics model, negative perceptions may still affect the individual franchise.
@Sunny27 - That is so true. Another pitfall of owning a franchise is that the franchise problems become your problem as well.
There was a well known sub shop franchise that was misrepresenting information and many of the franchisees lost their businesses because they could not make any money because the information given to them was fraudulent.
While this is an extreme example, any negative problems associated with the franchise such as lawsuits or negative publicity would also negatively impact the franchisee so you really have to do your homework in order to protect your investment.
@Cafe41 - I agree. I like to look at various franchises for sale in business publications just to see what the typical net revenue or cash flow of a particular business is. Most business listings will offer that information and it will give you another place to verify if the potential revenue for a particular business model is correct.
Another thing that I would consider regarding the franchise business model is the actual territory guidelines because I had a friend that opened a supplemental education business and only two miles away someone else opened another location that was competing with my friend’s business.
It seems that some franchise companies offer too small of a protected territory so it is something that you should consider when opening a franchise. The model franchise agreement should have all of the details and getting a franchise attorney would be very helpful at this stage.
@Sneakers41 -I have to say that I would love to open a coffee franchise. Some of the franchises don’t even require a storefront location and you can just open a kiosk or use a cart and that doesn't cost that much.
I think that might be cheaper in the beginning and when your business takes off you can probably open another location. I also wanted to say that fast food franchises are also very lucrative but many of the top franchises want you to open multiple locations simultaneously so it could be expensive and you really have to have a lot of money to get started.
This is especially true if the franchise is new on the market because the company wants to make a large impact quickly which is why they want multiple locations.
I think that franchise opportunities are great for people that have never had a business and would like to have one but might be overwhelmed with starting their own business from scratch.
The nice thing is that the franchise is like a business in a box. The franchise business model offers a structured system that allows for training and advertising support and a lot times they will help you find the right location and negoiate a lease for you.
If I were looking to open a business, I would consider a franchise related to my interests because for me it is not so scary to open your own business when you have so much support and an actual road map.
The only downside is the franchise fees. Having to pay royalties is the only negative that I can see.
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