Wednesday, March 16, 2011

Business Model - Franchise

The last of the business models we discussed about was Freemium; today we would explore the Franchisee business model.

We generally see brand names McDonald, Cafe Coffee Day and the like, expanding their operations to almost every small town in the country. How do they manage to scale up so quickly? They expand so at such speeds since the original companies - McD, CCD etc don’t really do all the necessary investment for every new outlet, they tie up with others who show the necessary interest & aptitude for their brand - Their business expansion style is called Franchise Model.

The franchisee business model has two parties in it -

  • The franchisor - who is intending to expand his business (sometimes this could be at two levels - the main franchisor who owns the business and the franchisor who would have the power to license and expand the
  • The franchisee - who intends to use the Franchisor's brand name and develop it at a location

These two are bound by a franchise agreement valid for a franchising period of time. The franchise agreement documents the details of the operation procedures, the rules and regulations that would bind the franchisee, non compete-clause, details of investment etc.

The franchise model has its own advantages and disadvantages. The advantages for the franchisor include a quick expansion of the business in areas which would otherwise be difficult to reach; the investment needed for the new set up would be shared with an additional resource - the franchisee. For the franchisee get the benefit of an established business model from the franchisor, a brand name, limited knowledge suffices as training is provided. The disadvantage on the other end would be that the franchisor would have to let go of the franchisee if the franchisee so wills after the franchise period. Given this scenario, it might open up another competitor in the business. The localization of the service or product to suit the needs of the local people.

This business model has been adopted extensively in the hospitality industry. Use this business model for expansion of your business only once you have learnt its nuances, and limit your risk with a good agreement.

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