How Does a Franchise Business Model Work and what are The Benefits

Probably you've come across the term franchise and wondered what it entails. You'll know more about the franchise by the end of this article.

A franchise is a kind of business operated by an individual (franchisee) who uses the trademark and rights of another company (franchisor) to conduct business. The franchisor is the parent company, and the franchisee is the small business.

How does the Franchise Business Model Works?

Specific procedures need to be followed for any business to thrive. Therefore, the two parties (franchisee and franchisor) must agree on franchising. A legal agreement and relationship between the franchisee and franchisor are created.

The two parties need to sign a contract known as a franchise agreement. Upon signing the contract, the franchisee can use the rights of the franchisor's business to trade. However, it is the franchisor's role to offer training, marketing, and financial planning.

Franchise business is conducted according to the terms specified in the contract. With the bidding agreement on board, disagreements between the two parties are limited. However, the franchisee is expected to pay the franchise fee to the franchisor.

You know what is expected in franchising so far if you're following closely.

Benefits of Franchise Business Model

What motivates you to do business are the benefits derived from the business itself. If no profit is realized, the business may collapse in the long run.

Here are the benefits of the franchise business model.

1.     Business Expansion

Franchising helps franchisors utilize franchisee royalties collected to expand the business and brand. The franchisor may opt not to borrow money from lending institutions and use royalties for financing. This will minimize the financial constraints faced while repaying loans.

Franchisor has added the advantage of expanding the business to the untapped markets. The ongoing royalties collected from franchisees may play a significant role in financing new branches to reach out to the new markets.

2.     No Business Experience Required

Franchise experience is not a requirement to run the business. You may ask yourself why experience is not required. The franchisor is responsible for providing personnel training and business support to the franchisee.

The training is based on performance standards, stipulating the duties of the employees and business administration. Eventually, the franchisee can run the business with ease. Marketing also becomes easy since you're dealing with an established product or service.

3.     Low Capital Requirement

For any business to start-up, high capital is required. This turns out to be a hindrance, especially where intensive capital is needed.  

Entrepreneurs may opt to own a franchise since low costs are involved. Additionally, potential growth is still high due to business support. Franchisor offers support until when the franchisee can run the business alone.

Conclusion

Franchising can be a way to start a business you've ever dreamed of. With changes in business dynamics around the world currently, franchises can't be ignored. Small businesses can now compete with big ones.

Resources are available for you, and the opportunity is there. Eventually, both franchisee and franchisor end up benefiting from this business relationship.