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Dec
06

Understanding the Franchise Business Model

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A regular person with no formal business education would most probably look into franchising as a feasible business opportunity. As a matter of fact, many entrepreneurs would opt to buy a franchise than to start a business from scratch. But what really is the franchise business model and how does it work?

Franchise Defined

Franchising is the right given to a party to carry the name, logo, brand, and trademark of another company and use it for commerce. Such right is applied to a particular area, location, or territory that is assigned exclusively to them. Other proprietary tools may also be included in the deal, which are usually defined by the franchisor. Both parties are required to adhere to the franchising contract that they both signed.

How does it work?

In aid of simple discussion, franchising is just like buying a pre-made business. Through it, entrepreneurs will have everything they need – from products to marketing tools – to get the business up and running. All will be provided to them at the time of signing and after paying the franchise fee.

But it doesn’t end there. The things that franchise owners have to learn about the business will be taught to them as well. Training and support will be provided by the franchisor. This is their way of aligning a franchise with all the others.

In essence, you’ll be allowed to open up your own store using the company’s name, slogan, and logo, in a particular area. All supplies have to be ordered from the franchisor, including employee’s uniform, signage, marketing flyers, and all business essentials. Often times, the initial order is already included in the franchise fee. But all subsequent requirements would have to be paid for.

However, royalties would have to be paid for too. Royalties pertain to a small percentage of the net sales. Franchise owners will have to pay them, which may anywhere run from 4% to 9% of the total sales, paid monthly or annually, depending on what was agreed upon.

The Business Model

As with most businesses, there is a ladder of opportunities present in franchising. There is what they call the single franchise ownership, and that goes to the first rung. Owning multiple franchise is the second step. The third level is called the area developer franchise. The fourth, which is the highest level, is the master franchise.

Each of these levels follow the basic rules of franchising, but with increasing income opportunity. In multiple franchise ownership, owners buy several units with the intention of compounding their earnings. If they opt for the area developer franchise instead, then they will be given a wider, more exclusive territory so they can develop as many stores as they can. The highest level is the most feasible one. Master franchising has all the perks enjoyed by the other levels, plus the ability to acquire your own set of franchise owners. Those at the masters level also get a percentage of the franchise fee, royalties, and all the purchases that their franchise units make.

Understanding the Franchise Business Model

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