Franchising as a business model: pros, cons and examples

Contents · 5 sections

1. What is a franchise?
2. How the franchise model works
3. Advantages and disadvantages of franchising
4. Examples of successful international franchises
5. Companies offering franchises in Bulgaria

Starting a business is an exciting moment for any new entrepreneur. But before an idea becomes a successful company, you have to work through a long list of challenges and find an answer to each one.

If you’re building from scratch, you have to think about everything: products or services, pricing, how the work will be organized, marketing, brand identity and more. The list is long, and this is often where people give up, because starting a company turns out to be harder than they expected.

Franchising is a popular business model that takes many of those unknowns off the table and lets you start under an established brand. How does that work? Let’s take a closer look at what franchising is, how it works, and what its pros and cons are.

What is a franchise?

Franchising took shape in the US in the 19th century and is hugely popular in many countries today. A franchise rests on a contract between two parties, the franchisor and the franchisee. The franchisor gives the franchisee the right to use its brand, products, know-how and more. In return, the franchisee pays an upfront fee plus a percentage of sales.

If that sounds abstract, here’s a simple example. Ivan decides to open a fast-food restaurant. He needs to find food suppliers, come up with signature burger recipes and buy kitchen equipment. He also has to hire and train staff, put together a financial plan, and figure out marketing and advertising for his new brand.

He has two options: do all of it on his own, or go the franchise route. If he picks the second, Ivan can sign a franchise agreement with one of the popular fast-food chains that offer franchises.

The agreement spells out all the terms, including the upfront fee, how long Ivan will hold the franchise and what the franchisor has to provide. Depending on the deal, Ivan gets the right to use the brand and may also get technical help, training, marketing support and more. In short, everything his business needs to launch and grow.

How the franchise model works

There are two main types of franchising:

Product distribution franchising

Here the franchisor makes the product and the franchisee sells it. This type is less common. The relationship looks a lot like the one between a supplier and a dealer, with a few differences. The main one: a franchisee may sell the products on an exclusive or semi-exclusive basis, while a dealer can often carry several competing brands at once. Coca-Cola, John Deere and Ford Motor Company all use this kind of franchising.

Business format franchising

This is the most common model. As with product distribution, the franchisee can use the franchisor’s brand and trade name, but they also get the franchisor’s entire way of doing business. That keeps every location running to the same standard. Most of the franchises that spring to mind, like KFC, Subway or McDonald’s, work this way.

Advantages and disadvantages of franchising

Like any business model, franchising has its upsides and downsides. Let’s look at both.

Advantages

For the franchisee, the biggest advantage is the franchisor’s support, which takes care of some of the hardest parts of building and growing a business.

With a franchise, you also start out with a name the market already knows. You don’t have to build a brand from scratch, which takes a long time and a lot of work. A familiar brand has already earned people’s trust, so you inherit a customer base, too.

Lower risk and better odds of success are two more big draws. Companies that sell franchises have usually been around for a long time and have proven systems their franchisees can plug into.

Disadvantages

Franchising also comes with limits and drawbacks you should know about before you sign.

For most franchisees, the most frustrating part is living with the restrictions in the agreement. The franchisor can control much of the business and many of the franchisee’s decisions, including location, hours, advertising, decor, prices and more.

Then there’s the upfront fee. It depends on the franchisor and the terms you agree on, but a franchise from a well-known, established company usually means a bigger initial investment.

And while the support network is one of the perks of owning a franchise, you may still clash with your franchisor at some point.

Examples of successful international franchises

Franchising is especially common in fast food. Almost every major global chain whose burgers or wings you’ve ever eaten offers franchises.

The undisputed leader, though, and one of the most successful franchises of all time, is McDonald’s. The fast-food giant has more than 33,000 franchise locations around the world serving its iconic burgers and fries. The world’s largest franchise network has generated $89 billion in sales, more than its three biggest competitors combined: Burger King, KFC and Subway. Those three have built successful franchise models of their own and rank among the largest franchises in the world.

Another great example is 7-Eleven, the popular convenience store chain that got its start in the US. The network includes more than 55,000 stores in 16 countries, most of them in Japan and elsewhere in Asia.

Franchising works beyond restaurants and grocery stores, too. Take car rental brand Hertz, founded back in 1918. With global sales of $14 billion, Hertz is one of the largest car rental businesses in the world, with about 9,000 locations in 147 countries.

The world’s largest beverage company, Coca-Cola, also runs a successful franchise model that lets franchisees sell and distribute the finished product under its brand, trade name and logo. Fun fact: the company started doing this as early as 1899, when it began selling bottling rights to businesspeople who could bottle its drinks in large volumes. That helped the product spread quickly into new markets.

Companies offering franchises in Bulgaria

With so much going for it, franchising has spread around the world, and Bulgaria is no exception. Big international fast-food chains like McDonald’s, Burger King and Subway offer franchises here. Some Bulgarian chains do, too, such as the fast-food chain Aladin Foods.

Gas station brands like OMV, Shell and others offer franchises as well. And the Bulgarian secondhand clothing chain Mania is successfully growing its franchise network both at home and abroad.

All in all, franchising can give any entrepreneur real advantages and room to grow. Just do your homework and think hard about whether the franchisor’s terms are right for you before you sign.