Franchising is a business model where the franchisor (the owner of the brand) is selling exclusive rights to a franchisee to run a business under that name on a certain territory. To give you an example, the fast-food conglomerate McDonald’s doesn’t own a single restaurant directly. They’re just selling a franchise to a local interested party. Here you can see how to make franchising profitable for all parties.
In this example, it’s clear that a franchise can be incredibly profitable. Still, does this mean that all the franchises make it? Of course not! The task of being successful is made even more difficult by the requirement for a franchise to be profitable both for the franchisor and the franchisee. How does one make all of this work? Here are a few tips and pointers to help you out!
The first thing worth mentioning here is the cost of the franchise. This decides the profit of the franchisor, as well as the break-even point that the franchisee will face. How many “installments” until you’ve paid off the license of a franchise? Now, keep in mind that a license has to be renewed, which means that you have a certain timeframe within which the cost needs to be paid off and profit gained. In order to make the business profitable for both parties, you need to ensure that both of these are settled.
Establishing a payment method for the franchisee is incredibly important, seeing as how it will determine who can afford it. Just because someone has the money for your franchise it doesn’t mean that they’re a great fit. Just because someone can’t pay doesn’t mean that they wouldn’t be a profitable franchisor. Even the cheapest of franchise licenses can be unobtainable if you request that it be paid upfront. Sure, a potential franchisor may go to a lender and then pay it off in installments but why not do this directly? As a franchise, this provides you with a steady stream of income, as well.
Tested Business Model
One of the biggest challenges when starting an original business is the unreliability of your business model. For a lot of industries, there’s just not enough available data out there. So, you’re expected to proceed based on your gut feeling. For instance, if planning to start a tea place, you really wouldn’t find much to go on about. On the other hand, by buying a successful bubble tea franchise, you can at least start with a tested business model. From this point on, you need to handle your day-to-day challenges and ensure that you find your place in the local economy. Sure, a difficult task but one less thing to worry about.
Level of Assistance
The franchisor needs to provide a certain level of assistance to the franchisee; however, this needs to come with a note of caution. First of all, the more assistance you provide, the more likely the franchise is to live up to the standards of your brand. In turn, this leads to better uniformity and better yield. On the other hand, as a franchisor, your time has value. Spending too much time onboarding a new franchisee only to see them fail is a wasted investment. This is a topic that you need to approach very carefully.
More Negotiating Power
One of the biggest advantages of owning a franchise lies in the fact that the weight of the entire brand stands behind you at the negotiating table. A small business has almost no leverage but if there’s uniformity in supply acquisition, the brand can negotiate as a whole. This means getting a much better deal for everyone, ensuring that everyone profits. The franchise appears more lucrative, as a whole, while the franchisor can look forward to more profit. Moreover, this means that managing the finances of a franchise tends to be somewhat simpler than managing small business finances.
Be Careful with Vetting
An interesting thing about selling a franchise lies in a sort of a paradox. Your franchise is a product but every time you sell it, the overall value of the product still left in your possession grows. Same as with stocks, the higher the demand, the higher the value. However, you need to be extra careful about to who you’re selling the franchise. The customer base may not be familiar with the nature of franchising as a business model. All that they’ll see is that someone operating with your logo and brand name is providing a sub-optimal service and all your brand will suffer.
At the end of the day, each of the above-listed factors involves looking at things from both perspectives. If the cost is too low, the franchisor is not making money but if it’s too high, it will be less profitable for the franchisee. In scenarios like this, it’s important to find a middle ground. On the other hand, there are some situations in which their interests align quite well.