Franchise Business Model

When starting a business, there should be a concrete roadmap to follow from the start until the business becomes stable on its own. The idea of having a business model is perfect. It allows the business to have a well-defined flow of processes and strategies that help it grow through time.

However, this model bears the exact same idea in a franchise system. Commonly known as the franchise business model, this paradigm makes a specific franchise function well. In fact, it is not new in the industry. It is an existing standard that layouts the foundation of a franchise business, its operations, including distribution and networks.

Franchise Business Model vs. Business Plan

There are times that a franchise business model is often confused with a business plan. In a nutshell, these two ideas differ in terms of their uses. That is all you need to know.

A franchise business model is defined as the structure of the business itself, while a business plan is intended for funding purposes. As someone who plans to do business, you must have a ready business plan to present when going to financial institutions to look for funding.

For a franchise business model, the essential things to define are the following:

  • The nature of the franchise business
  • The relationship between the franchisor and franchisee
  • The legal and commercial responsibilities of the owner towards his/her franchise clients
  • The franchise’s operational management and operating systems
  • The distribution and supply chain of the business

This is very important and should be detailed in a franchise business model. The owner should be able to indicate the kind of business that he/she has in the industry. Anyone can quickly think and decide about opting to franchise the business, but without a clear nature of the business, this can be a headache to start with.

Franchising in the Philippines is always a great opportunity to venture. However, you must know almost everything about it to avoid any problems in the future and while still learning how to run the business independently as a franchisee.

Among the concepts to learn are the franchisor and the franchisee relationship. The franchisor is the owner that sells the rights to the franchise. He/she developed the company and the brand, its marketing and other strategies, including the operating system for operations.

As the owner, the franchisor has the sole decision to franchise the business through the franchising agreement which gives franchisees the right to use everything about the brand legally.

Moreover, in the process, the franchisor will have to offer varied training and support to the franchisees and extend such assistance in other aspects of the business as the need arises.

On the other hand, the franchisee is the one who buys the rights to sell the brand, which includes its products and/or services. Technically, franchisees are buying a pre-established business, with a known success history in the business and working business model. Yet, this should not give the franchisee the idea of not working hard anymore.

The main thing to do as a new franchise owner is to learn the business as the franchisor did, operate it accordingly to gain loyalty in the market, and attract potential talent and customers that can grow the franchise.

Overall, the franchisor-franchisee relationship should have mutual respect from each other. Relationships between franchisees and franchisors tend to differ from brand to brand but one thing will always remain the same - this kind of relationship is something that should not be taken for granted.

Types of Franchise Business Models

When buying a franchise in the Philippines, it is recommended to familiarize yourself with the most common types of franchise business models. This is important aside from knowing how to select the right franchise that suits you. From the current market, there are two known franchise business models: The Product Distribution Franchise Model and The Business Format Franchise Model.

Product Distribution Franchise

In this model, the franchisor manufactures the products and the franchisee sells them. It is similar to the supplier-dealer relationship except that in the franchise relationship, the franchisee may distribute the products on an exclusive or semi-exclusive basis. On the other hand, in a supplier-dealer relationship, it may allow the dealer to sell several different brands at once.

Business Format Franchise

This is the most common model wherein the franchisee is allowed to use the brand and trade name of the franchisor. It is somehow similar to the product distribution model, except that they already have granted access to the first model.

Benefits of a Franchise Model

Franchising provides benefits for both the owner and the franchisee. For franchisors, they have the chance to use people's money to grow the brand rather than extending the network using their own resources.

That is why some franchisors also collect ongoing royalty fees so they can continually support the operations of all the franchise businesses. The fees and royalties are usually used to fund the following:

  • Operations at the headquarters
  • Training and supporting franchise owners
  • Marketing and advertising the brand
  • Improving the quality of goods or services
  • Building the brand in the marketplace

For franchisees, here are some of the benefits:

  • Higher chance of success than venturing into a sole proprietorship business
  • Shorter time to open the business
  • There are initial training and ongoing support
  • You can have assistance in finding the best place for a franchise
  • There is a proven selling power that drives the brand’s popularity and sales
  • You will have lower costs because it is a group purchasing
  • It has an established business model
  • The national and regional advertising campaigns are all streamlined
  • There is a centralized customer lead generation through websites
  • There is support from the peer network of your fellow franchisees to provide advice and support 
  • You get to attend annual conferences and be part of franchisee associations

The ‘Follow the System’ Mantra

Every franchise owner lives up to the "follow the system" mantra in franchising. It is considered to be a critical factor in determining the success of a franchisee. By having this idea, it means the franchisee must carefully follow all the protocols in operating the business, including the proper system processes of the franchise business model.

In the first place, franchisees opt to get a franchise from the franchisor knowing that the business model works well and will let them succeed and earn a profit if they follow it diligently. 

Talking about changes and suggestions, some smart franchisors are always open to these opinions, but the final decision still comes from them. When this happens, it is difficult for a franchisee to insist on his/her idea to the franchisor who might be hesitant about it. It may seem a violation of the agreement and disrupting the current working ‘system’ of the business.

Franchisees must be vigilant because carelessness can result in revocation of their right to do business under the franchisor's name. They must agree to keep the franchisor's proprietary system and trade secrets confidential, as well as sign a non-compete agreement.

Misconceptions and Warnings

There are also common misunderstanding when it comes to franchising. Here are some things to remember:

A mistake of one is the mistake of the whole franchise. This is true especially if one franchise got a bad reputation because of bad service or products. However, even if franchisors do not own all the franchises, they are still held liable when problems arise. They need to fix any problems and help them be back on track if a unit underperforms. The downside, it also means less in royalties for the franchisor.

An important consideration is to make sure that your business is ready for franchising. Before deciding to expand through franchising, make sure it has a system and type of operation that is conducive to franchising.

At times, franchise consultants can help but you must also not rely on them everything. Do your part as a franchisee. You will know that your business is ready for franchising if you can offer something unique to offer in the industry, with a model that is easy to use. It should also be adaptable different places, especially if your plan is to franchise on a large scale just like for area and master franchises.

Are you a business owner who has a plan to franchise your business? It is time for you to evaluate first the important part of a franchise which is the business model. If you are confident that you can manage to have other people own the business, then go on.

For franchisees, the takeaway is to learn the system as much as you can. After all, it is the business’s lifeline and should be your key to success as well. Hope this guide helps you well with your franchise decision-making. Franchise Market continually advocates providing important information to everyone who is interested in franchising. We are here to help you throughout the process. Check out more of our useful articles here

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