The Pros and Cons of Different Franchise Models
Franchising is a tried-and-tested method of business expansion. It’s been a driving force behind the growth of countless successful companies, from international fast-food chains like McDonald’s to regional general stores like Buc-ee’s.
But franchising isn’t a one-size-fits-all solution. Each franchise model has its own set of advantages and drawbacks.
In this post, we’ll teach you all about the strengths and weaknesses of various franchise models. Whether you’re an aspiring franchisor or franchisee, reading on will help you identify which franchise model best aligns with your unique business needs.
But first, what are the general pros and cons of franchising?
Like any business model, franchising comes with some unique benefits and challenges.
These apply both to franchisors (those who own the franchise brand) and franchisees (those who receive the rights to operate under the parent brand).
So let’s look at each in turn.
- Faster growth: Franchisors capitalize on the investment, local knowledge, and entrepreneurial mindset of their franchisees. This makes it easier for franchisors to replicate their business model across multiple locations compared to opening new business units themselves.
- Access to capital: Franchisees typically contribute an initial capital investment to open up a new franchise unit, making it less expensive for franchisors to expand their business.
- Greater brand recognition: When franchisors expand their business to new locations, more people come to recognize the franchise brand. And as a franchise’s reputation for quality products and services grows, its profits will likely grow too.
- Less employee supervision: Franchisors typically delegate most of the day-to-day management of employees to their franchisees, allowing them to focus on broader aspects of the business, like franchise marketing.
- Less control: Franchisors must give up significant control over the day-to-day operations of their franchise units to their franchisees. And even though franchisors usually give franchisees strict guidelines on running their business, deviations do occur and can impact the brand’s reputation.
- Setup costs: Franchisors must devote time and resources to expand their franchise to a new location. Costs can include paying a lawyer to review the franchise agreement, consultancy fees, and occasionally a capital contribution to get the new franchise unit up and running.
- Support costs: Franchisors must also typically cover the cost of providing franchisees with ongoing training, support, and marketing assistance with SEO, PPC Management, and more.
- Franchisee selection: Franchisors are responsible for vetting and selecting new franchisees to join their network. This isn’t an exact science; the wrong call could lead to conflict or damage to the brand.
- Ready-made blueprint: Franchisors provide franchisees with a proven framework for business success, reducing the headaches of setting up a new business from scratch. Depending on the franchise model, this framework can cover anything from branding guidelines to standard operating procedures.
- Brand reputation: Franchisees benefit from using the franchisor’s established brand reputation, giving them immediate access to an existing (and often loyal) customer base.
- Ongoing support: Franchisees often receive continuous support and training from their franchisor to help them operate their business more effectively. This can include guidance around supply chain management, marketing assistance, and IT support.
- Territorial exclusivity: Franchisees often receive exclusive rights to operate within a specific geographical area. This allows them to focus on succeeding within their local markets without worrying about competition from other franchise units from the same franchise brand.
- Upfront investment: Franchisees typically must make a significant capital investment to join a franchise network. This includes a franchise fee, the cost of buying equipment, and the initial business overheads.
- Royalty payments: Franchisees are also usually obligated to pay ongoing royalties to their franchisor as a percentage of their revenue. This can sometimes affect the franchisee’s cash flow and profitability.
- Limited control: Franchisees often have much less autonomy over high-level business decisions than if they ran a fully independent company. They must strictly adhere to the franchisor’s guidelines and standards, which may leave little to no room for flexibility.
- Franchisor oversight: Franchisees may sometimes feel that franchisors monitor their operations to an excessive degree, adding undue pressure to meet expectations and standards.
Now we’ve covered the pros and cons of franchising in general, let’s take a look at specific franchise models.
Note: You can learn more about how each model works in our guide to franchise models.
Under this model, franchisors allow franchisees to sell franchise products and services under the franchise banner. Franchisees also replicate every aspect of the franchisor’s business, from operational procedures to customer service standards to franchise marketing strategies.
- Established business plan: Franchisors can scale their proven business model across multiple locations, allowing franchisees to hit the ground running with minimal growing pains.
- Operational support: Franchisees receive ongoing support and training from franchisors, ensuring that product quality and customer service standards remain consistent throughout the franchise network.
- Economies of scale: Franchisors can expand their business to new territories without significant capital investment, while franchisees can benefit from cost savings due to the franchisor’s bulk purchase advantage.
- Initial costs: Franchisees face significant start-up costs, including a franchise fee. Franchisors cover the costs of training and supporting new franchisees.
- Ongoing payments: Franchisees must pay recurring royalty fees to the franchisor, either at a fixed rate or a variable percentage of total sales. Franchisors depend on these royalties, which may not be enough to support the entire franchise network.
- Control restrictions: Franchisees have limited power over the direction of their business, while franchisors may encounter difficulties ensuring consistency across the franchise network.
Under this model, franchisors allow franchisees to sell their products within a specific area. Franchisees operate under their own brand name and retain control over most business decisions.
- Established product catalog: Franchisees get to sell products with proven market demand, eliminating the need to develop their own products. Franchisors save time and resources by having franchisees distribute products to end-users on their behalf.
- Exclusive rights: Franchises typically receive exclusive rights to sell and distribute products within a given area, thereby reducing market competition. Franchisors retain greater control over market saturation.
- Cost-efficient marketing: Franchisees can save on marketing costs since franchisor’s often take care of regional and national marketing campaigns to ensure a consistent brand identity across the network.
- Product dependency: Franchisees have no control over the fundamental quality of the franchisor’s products. If standards slip, production costs increase, or a new competitor emerges, franchisees may experience a drop in sales. Franchisors must continually invest in product development and quality control to maintain a competitive advantage.
- Territorial restrictions: Franchisees may experience restricted growth if their exclusive rights prevent them from accessing product demand outside their designated territories. Franchisors must regularly re-evaluate what they deem to be well-defined territorial boundaries.
- Royalty-based problems: Franchisees may feel that royalty fees squeeze their profit margins and are too high relative to the support and service they receive. Franchisors must balance the need to make a profit with maintaining positive relationships with franchisees.
This model gives franchisees the rights to manufacture and distribute the franchisor’s products in accordance with the franchisor’s established processes.
- Product consistency: Franchisees follow detailed manufacturing guidelines provided by the franchisor to minimize discrepancies in product quality.
- Scale efficiencies: Franchisees may benefit from the franchisor’s ability to buy raw materials in bulk (depending on the nature of the franchise agreement). Such cost savings can incentivize franchisees to invest in new franchise units, thereby increasing the franchisor’s overall revenue.
- Ongoing support: Typically, franchisors will provide franchisees with guidance around various aspects of the production process, including supply chain management, inventory management, and production scheduling.
- Manufacturing complexity: Franchisees must quickly master the intricate manufacturing processes and standards the franchisor sets. Franchisors may need to provide significant training and support to help franchisees overcome production challenges and meet regulatory requirements.
- Supply chain difficulties: Franchisees and franchisors can face significant challenges if there are any disruptions in the supply chain.
- Quality control: Franchisors must develop rigorous quality control measures and ensure franchisees follow them to the letter.
This model allows independent businesses operating within the same niche as the franchise to “convert” into becoming a franchise unit. These businesses undergo a transformation in which they take on the franchisor’s branding and processes. Converted franchisees usually retain more control over operations than business-format franchisees.
- Faster expansion: Converted franchisees can immediately tap into the franchise’s existing customer base and brand awareness, while franchisors can rapidly grow their network without establishing new franchise units from scratch.
- Local knowledge: Franchisees typically have a deep understanding of how to cater to their local markets, allowing franchisors to better tailor their products and services to regional customer preferences.
- Limited risk: Franchisees already have a proven track record of success within the same industry as the franchisor, reducing uncertainty for both parties.
- Control tensions: Converted franchisees usually keep significant control over how their units operate. However, the franchisor-franchisee relationship may get strained if there are fundamental differences in opinion.
- Integration difficulties: Franchisees sometimes struggle to adapt to the franchisor’s ways of doing business, which may require the franchisor to invest in additional training and support.
- Limited consistency: Franchisors may encounter difficulties ensuring standardization across the network when franchisees retain significant autonomy over their operations.
Under this model, franchisees assume the role of “master franchisees,” acting as sub-franchisors on behalf of the parent franchisor. This means they develop and manage their own sub-franchisees within a designated territory.
- Accelerated growth: Franchisors can expand their network to new places more rapidly by tapping into the master franchisee’s capital investment and local knowledge. Master franchisees benefit from more royalty payments the more sub-franchisees they establish within their designated territory.
- Reduced franchisor responsibilities: Master franchisees take on most operational duties of their sub-franchisees, including training, recruitment, and supply chain management. This allows franchisors to focus more on higher-level activities affecting the entire franchise network.
- Multiple income streams: Master franchisees receive royalty payments from their sub-franchisees. The parent franchisor gets a fee for the rights they grant the master franchisee plus a share of sub-franchisee royalty payments.
- Complexity: Franchisors must oversee several master franchisees who, in turn, must manage their own network of sub-franchisees. This multi-tiered structure can give rise to some unique operational difficulties.
- Communication challenges: Master franchisees are often spread out across vast geographic areas. This can make it difficult for information to flow smoothly between the parent franchisor, the master franchisee, and the sub-franchisees.
- Quality control: Master franchisees are responsible for ensuring their sub-franchisees adhere to the franchisor’s strict standards and practices. For this reason, franchisors must take care to appoint master franchisees who are capable of living up to these management demands.
Under this model, experienced investors provide the capital needed to establish or acquire a franchise unit. In return for their investment, franchisees receive a cut of the franchise unit’s profit. Investment franchisees don’t usually participate in the day-to-day running of their franchise unit.
- Capital injection: Investment franchisees get to be part of an established brand without starting their own business, while franchisors receive additional funds to expand their network.
- Risk sharing: Franchisors and franchisees often share financial responsibilities, reducing the risks and liabilities of each party.
- Reliable income: Investment franchisees can generate income from their franchise units without direct involvement in business activities, while franchisors receive royalty payments from those franchisees.
- Royalty sharing: Investment franchisees and franchisors each take a cut of the franchise unit’s revenue. This may reduce the desired return for both parties.
- Selection challenges: Before investing, franchisees must thoroughly evaluate the franchisor’s track record. In contrast, franchisors must ensure that potential franchisees have sufficient financial resources and share their values and brand vision.
- Relationship management: Franchisors, investment franchisees, and active franchisees may struggle to manage one another’s expectations and requirements effectively. Success depends on establishing a clear system of communication between all parties.
Franchising can be an effective growth strategy for entrepreneurs and businesses across a range of industries. However, before committing to the franchise way of business, it’s essential to carefully consider the benefits and downsides of various franchise models.
The above breakdown of different franchise models will help you weigh up your options and reach a decision that satisfies your unique business aspirations.
Of course, no matter which model you choose, you’ll need a well-structured franchise marketing program to maximize your business growth. Feel free to get in touch if you’re looking to outsource your digital strategy to an experienced franchise marketing agency.