Franchisee vs Franchisor
So, franchisee vs franchisor: In this blog, I’m going to go through the number one reason why franchisees like the franchise system. And I’m going to go through the number one reason why the franchisor likes the franchise system. Franchisees are attracted to profitable business owners for these two main reasons.
Let’s start first with the franchisor. For the franchisor, in a very capital efficient manner, they can expand their business beyond just a little local area to nationwide, and potentially international. So imagine, I’m in Miami Beach. I have a Latino food business, one restaurant is doing $100,000, the other one’s doing $200,000. And I have the opportunity to open up more restaurants, but it’s gonna cost me $300,000, $450,000 to open up. I can also expand through franchising. Where I can have entrepreneurs open up Latin restaurants throughout the United States and attend to this growing U.S. demographic.
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Profitable business
And with this, I do not have to invest that much upfront capital. It’s actually the franchisee who’s, one, paying a franchise fee, as well as ongoing royalties for me for the brand, the technology system, and everything I’ve built. And how I have a profitable business model here in Miami, just with these two restaurants, there is the potential to expand to hundreds of restaurants throughout the United States, and then internationally.
Franchising allows you to expand your business in a very profitable way, high-margin way.
Where we see franchisors with profit margins of 30%, 40% plus. And you can do that relatively quickly. However, you should be responsible with it as there’s been a lot of franchisors that go from 2 to 100, 2 to 200, and have major issues where it’s better and more responsible to go 2 to 5, 5 to 20. On a yearly basis, you’re growing, but you’re not having crazy growth and you’re more incentivized from that ongoing royalty than the franchise fee that you’re collecting for every one that you sell.
Business owner
So franchisors like it, as they can expand relatively fast and a capital-light way, and they might be attracting business owners to essentially work together where they couldn’t necessarily have afforded that business owner to join as an employee or general manager. Hence the model where for Chick-fil-A, instead of having a general manager, they bring in a part owner to run and operate a multimillion-dollar business, which the average Chick-fil-A does well into $3 million, $4 million of top-line revenue.
Now, from the franchisees’ perspective. For franchisees, franchising is an attractive business model, where you do not have to reinvent the wheel and you can minimize the time and money it takes to break even. Talking from personal experience, we’ve started a couple of businesses, my brother and I, and breakeven can happen anywhere from three months, two years plus, so the business never breaks even you close it. Where with a franchise, it generally should happen sometime within the first 12 months. And depending on the business model and the pre-marketing that goes into it, it could happen as soon as the first month, second month, third month. Franchisees like the franchise model as they don’t really have to learn from their own mistakes, saving time, and money. Those are two reasons again why entrepreneurs like the franchise system.
