Introduction
I have been constantly questioning myself, what are the prerequisites for an innovation-driven venture to become successful and scale rapidly. Well, I realize that the success of a start-up truly depends on the various components such as team, timing, idea, access to the resources, and many more. However, in this short article, I would like to explore the business model as the main element of a successful start-up. Specifically, we will delve deeper into the franchise business model and we will try to discover the advantages and disadvantages of the model in the modern era driven by technology.
General context
First and foremost it important to explore the franchise business model in depth before we are moving further with our exploration. Basically, in a franchise agreement, a franchisee pays royalty to a franchise provider to get access to working business models, know-how, or even trademarks[1]. The conditions of the agreement may differ according to a business context. For instance, some franchise providers require to pay separately for purchasing franchises on top of royalty. The franchises in different forms have been around for at least 5 centuries and I still find franchises increasingly relevant in our modern society.
Examples of franchises
When we think about the franchise, most frequently pictures of McDonald’s, KFC, or even Subway pop up in our brains. These humongous companies are the most successful examples of franchises with over $20 billion in revenue every year[2]. However, the usage of the franchise business model is not solely bound to the food industry. There are a plethora of franchises in the real estate, retail, travel, beauty industries. Century 21 company is an outstanding example of a successful real estate organization that provides franchises to the market. The annual revenue of the organization is nearly $1.5 billion[3]. Another example that is worth mentioning comes from the software industry, where Eazi company provides a “business in a box” solution that enables franchisees to create app development and website development business. The organization provides partners with the app building platform, training, and branding. Also, the partners are obliged to operate under the name of the Eazi company[ 4 ]. I have outlined only a small fraction of the all existent types of franchises, however, it was important to provide a small glimpse into current use cases of the model.
Franchise for a start-up?
Why to even bother with the franchise if there are plenty of other working business models for my start-up? It is crucial to separate two distinct standpoints and answer two questions. First, are you willing to start a company with minimum risks by adopting something that works already? Second – are looking for a business model that will accelerate your venture and that will help you scale?
In the first case scenario, purchasing the franchise has a plethora of advantages as well as disadvantages. First and foremost, a franchisee does not need comprehensive business expertise. Usually, when you purchase a franchise, a franchisor offers you support and training to educate you, help you to gain experience in the industry, and reduce risks. Secondly, when one buys a franchise, he gets brand recognition that has been already built. Thereby you receive access to the customer base which is very difficult to build when starting the business.[5].Finally, you are still your own boss. From another perspective, the initial investment into the franchise may be high. Also, in some agreements, you will be paying royalties additionally. Secondly, the franchisor limits your creativity, because your business cannot alter the business model that was presented to you by a franchisor. Finally, financial data is not private. All of the financial data is being shared with the franchisor.[5]
In the second case scenario, franchising your business to others brings a huge amount of opportunities. One of the main components of a successful start-up is scalability. Franchising helps to grow your business rapidly and cost-effectively [6]. Since you do not need to invest in hiring new people, renting a new place, exploring new markets. Also, it is easier from the management standpoint, because franchisees manage the business by themselves and they are highly motivated to make the business profitable. [6]. It is worth mentioning that brand recognition positively correlates with brand recognition since every franchise helps to grow your brand. On a different side, you should have a successful business in order to be able to sell the franchise. Franchising is not an investment solution, it is rather an option to scale your business and increase revenue[6]. Also, your brand awareness should be already established. Another concern, that may not be that obvious is consistency in offered products and services. In my view, it is difficult to preserve the high-level quality of service or products that are being offered by all parties in a franchise. Since I believe that some products or services may be slightly altered due to the preferences of a franchisee, thereby it may reduce quality.
Conclusion
As I mentioned in the beginning, the success of a start-up depends on numerous components and no one can guarantee to you that a certain business model will grant you success. However, if you are starting or growing your business, it is crucial to consider all possible solutions that will lead you to success. In the article, we touched upon franchise for your business and tried to uncover all pros and cons of the business model. So now you should be better familiarised with franchising and you are equipped with one more option to consider.
Sources:
- https://www.nexea.co/25-business-models-for-every-startup/
- https://www.statista.com/statistics/208917/revenue-of-the-mcdonalds-corporation-since-2005/
- https://www.owler.com/company/century21
- https://www.eazi-business.com/
- https://franchisebusinessreview.com/post/franchise-advantages-disadvantages/
- https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-franchising-your-business
