Analyzing the Franchise Financial Model

05
Jul, 2015
Sunday - 06:52

Is Franchising the Best Option for Your Business?

Franchising is one method of expanding your business, but need not be the only option. Many franchise companies also distribute products and services directly to consumers through company-owned units, through other methods of distribution (such as supermarkets and the Internet), and through distributorships and commissioned sales agents. Alternate distribution methods have both risks and rewards when used alone and in conjunction with a franchise program.

Analyzing the Franchise Financial Model

A franchise must be able to produce a reasonable return on the franchisee’s investment, after deducting the value of the franchisee's time. If a franchisee is merely buying a job, his motivation and loyalty to the network may be short lived. The business also must be able to generate sufficient revenue to the franchisor.

A franchisor can capture only a portion of the gross revenue of a franchised outlet through continuing fees and the gross profit realized on sales of goods and services to the franchisee. If a business cannot generate a sufficient rate of return on the franchisee's investment and sufficient revenue to support essential franchisor services and a sufficient profit to the franchisor, the business is a poor candidate for successful franchising.

In today’s economy, if a business cannot generate a 20% return on investment after deducting a royalty (typically between 4% and 8%), it will have difficulty sustaining either the franchisee or the franchisor.

 

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