Franchising is a business model which allows business owners to expand their business cost effectively.
Franchising provides business owners capital with which to expand (funded by the franchisee) and a network of motivated owner-operators (again, the franchisee). The model is based on replication so the business can be expanded over and over, again and again.
As many of you would know, to open a new retail outlet or set up another mobile service unit takes up considerable time, energy and funds. To illustrate what is involved let us look at expanding a business by opening a new cafe using the traditional model of growth.
| Start-up items | Funding by the business owner |
|---|---|
| Commercial lease | $50,000 |
| Shop fit out | $100,000 |
| Stock | $50,000 |
| Staffing | $70,000 |
| Start-up advertising and marketing | $15,000 |
| Launch campaign | $5,000 |
| Total start-up costs | $290,000 |
Even if all goes well there is usually a significant lag time before the shop returns any profit. So, not only has the business owner spent money expanding into new premises, they have also spent money on the operations before they see any return. And, of course, while focussing on opening the new shop, often the first one suffers because of lack of attention and sheer exhaustion from opening the new premises. So it is no surprise that many business owners would like to grow their business but simply cannot afford to.
As many of you would know, to open a new retail outlet or set up another mobile service unit takes up considerable time, energy and funds. To illustrate what is involved let us look at expanding a business by opening a new cafe using the traditional model of growth.
| Start-up items | Funding by the franchisee | Funding to the franchisor |
|---|---|---|
| Commercial lease | $50,000 | - |
| Shop fit out | $100,000 | - |
| Stock | $50,000 | - |
| Staffing | $70,000 | - |
| Start-up advertising and marketing | $15,000 | - |
| Launch campaign | $5,000 | - |
| License Fee | $40,000 | +$40,000 |
| Total start-up costs | $330,000 | - |
