What is Franchise model?
Franchise model is business structure where a franchisor (the owner of a brand or business concept) grants the rights to an individual or company (the franchisee) to operate a business using the franchisor’s brand, products, and support systems. In exchange, the franchisee typically pays a one-time fee and ongoing royalty fees based on revenue. The franchisee gains the benefit of operating an established business with a proven model while the franchisor expands their brand and market presence.
Franchisee vs. Franchisor:
Franchisor: The entity that owns the brand, trademarks, and business model. They provide training, support, and guidelines to franchisees to ensure consistency and quality across locations.
Franchisee: The individual or business entity that buys the rights to operate a franchise. The franchisee is responsible for running the day-to-day operations, including staffing, marketing, and adhering to the franchisor's standards.
Different Franchise Models
There are several ways to structure a franchise, depending on how much control you want, how much investment is required, and how the business is managed. Here’s a breakdown of the most common models:
Company Owned, Company Operated (COCO)
With this model, the franchisor owns and runs the business directly. This is often used for testing out new concepts or for flagship stores. The franchisor handles all aspects of the business, from location selection to operations.
Pros: The franchisor keeps full control and makes all the key decisions.
Cons: It's costly for the franchisor and doesn’t involve franchisees in the process.
Company Owned, Franchise Operated (COFO)
Here, the franchisor owns the property and makes the initial investment, but the franchisee runs the day-to-day operations. The franchisee is responsible for staff, maintenance, and operational costs, but the franchisor takes the majority of the profits.
Pros: Low upfront costs for the franchisee.
Cons: The franchisee doesn’t have as much control over profits and operations.
Franchise Owned, Company Operated (FOCO)
In this model, the franchisee owns the business, but the franchisor manages operations. The franchisee focuses on managing the assets, while the franchisor ensures that the business runs according to brand standards and quality control.
Pros: The franchisor ensures consistency and quality across locations.
Cons: The franchisee has minimal control over daily operations and may have a lower profit margin.
Franchise Owned, Franchise Operated (FOFO)
This is the classic franchise model, where the franchisee owns and runs the business under the franchisor’s brand. The franchisee handles everything from staffing to marketing, but follows the franchisor’s system to maintain brand consistency.
Pros: The franchisee has full control over the business and keeps a larger share of the profits.
Cons: The franchisee bears the responsibility for the business’s success, and failure rates can be higher.
Other Franchise Models
Business-Format Franchise: The most common franchise model. The franchisor provides a detailed system for running the business, from operations to marketing. Popular in food chains like McDonald’s.
Product Distribution Franchise: The franchisee is given the right to sell the franchisor’s products, typically within a certain area. This model is common in industries like automotive or electronics.
Manufacturing Franchise: The franchisee manufactures products using the franchisor’s established processes and intellectual property. Think of franchises like Subway, which have strict guidelines for how sandwiches are made.
Master Franchise: A franchisee in this model acts as a “sub-franchisor,” overseeing the operations of multiple locations in a specific area.
The Benefits of Franchising
For franchisees, the main advantage is the reduced risk. They get to run a business with an established brand and a proven model. The franchisor provides support, training, and marketing, making it easier to get started. Franchisees also benefit from the brand’s reputation and customer loyalty.
For franchisors, the franchise model offers a way to expand rapidly without having to invest their own capital. Franchisees take on the financial risk, and the franchisor collects ongoing royalties.
Which Model is Right for You?
Choosing the right franchise model depends on your goals and what kind of control you want. Some people want the independence of owning and running their own business, while others may prefer the support and structure that comes with a more hands-on franchisor. Each model has its advantages, so it’s important to pick one that aligns with your business style and financial situation.
