Pros and Cons of Pros and Cons of Business Models Business Models

By Val A. Slastnikov,By Val A. Slastnikov,

Business Models ExpertBusiness Models Expert© 2010 Digitizer Group. All rights reserved© 2010 Digitizer Group. All rights reserved

PART SEVENPART SEVEN(Pros and Cons (Pros and Cons Of Franchising Of Franchising

Model)Model)

What is Franchising?What is Franchising?

FranchisingFranchising is a method of doing is a method of doing business wherein a "franchisor" business wherein a "franchisor" authorizes proven methods of doing authorizes proven methods of doing business to a "franchisee" for a fee business to a "franchisee" for a fee and a percentage of sales or profits.and a percentage of sales or profits.

Is Franchising for you?Is Franchising for you?

Who belongs in this Who belongs in this category?category?

Any type of a Franchise Owner Any type of a Franchise Owner (“franchisee”) if you are not a (“franchisee”) if you are not a

FranchisorFranchisor

Do you have what it takes Do you have what it takes to be a Franchise Owner?to be a Franchise Owner?

““Franchising” Franchising” Pros Pros

Franchise

Leverage:Yes

Franchisor’sModel

Franchisor’sSuccess

Franchisor’sTraining

““Franchising” Franchising” ConsCons

Franchise

Control:

No

Customer Base:

Limited

Startup Costs:

High

Carrying Costs:

High

Scale-ability:

No

Growth Potential:

Limited

Replic-ability:

No

Multiple Income

Streams:

No

Profit-ability:

Limited

Level of EffectivenessLevel of Effectiveness

Pros: Pros: 11 Cons:Cons: 9 9

Level of Effectiveness = 10%Level of Effectiveness = 10%

Franchise

Leverage:Yes

Franchisor’sModel

Franchisor’sSuccess

Franchisor’sTraining

Franchise

Control:

No

Customer Base:

Limited

Startup Costs:

High

Carrying Costs:

High

Scale-ability:

No

Growth Potential:

Limited

Replic-ability:

No

Multiple Income

Streams:

No

Profit-ability:

Limited

Analysis Analysis

Franchising Facts:Franchising Facts:

Franchise is a legal and commercial relationship Franchise is a legal and commercial relationship between the owner of a trademark, service mark, between the owner of a trademark, service mark, brand name, or advertising symbol (the franchisor) brand name, or advertising symbol (the franchisor) and an individual or organization (the franchisee) and an individual or organization (the franchisee) wishing to use that identification in a business. wishing to use that identification in a business.

The franchise governs the method of conducting The franchise governs the method of conducting business between the two parties. business between the two parties.

Generally, a franchisee sells goods or services Generally, a franchisee sells goods or services supplied by the franchisor or that meet the supplied by the franchisor or that meet the franchisor's quality standards. franchisor's quality standards.

AnalysisAnalysis

Advantages of Franchising:Advantages of Franchising:

Established Brand and Customer BaseEstablished Brand and Customer Base Marketing SupportMarketing Support Business SupportBusiness Support Training SupportTraining Support Access to Proprietary MethodsAccess to Proprietary Methods Reduced RiskReduced Risk

Analysis Analysis

Disadvantages of Franchising:Disadvantages of Franchising:

Initial Payout Initial Payout Royalty Payments Royalty Payments Marketing/Advertising Fees Marketing/Advertising Fees Limited Creativity/Flexibility Limited Creativity/Flexibility Sole Sourcing Sole Sourcing Long-Term ContractLong-Term Contract Dependent on Franchisor Success and Dependent on Franchisor Success and

Reputation Reputation False Expectations False Expectations

QuoteQuote ““Why would anybody go out and spend Why would anybody go out and spend

$50,000 on a franchise to makes $50,000 on a franchise to makes whateverwhatever when you can just start a when you can just start a business with no capital out of pocket business with no capital out of pocket and and way more scalableway more scalable?” ?”

– – Brad Fallon, a Co-founder of Brad Fallon, a Co-founder of StomperNetStomperNet

TakeawaysTakeaways ““If you are a real entrepreneur – then franchising may not be If you are a real entrepreneur – then franchising may not be

for you. Real Entrepreneurs don’t own franchises – they for you. Real Entrepreneurs don’t own franchises – they choose their own path to success.choose their own path to success.

All franchises are “screening out” entrepreneurs because they All franchises are “screening out” entrepreneurs because they don’t want them to mess with existing model.” don’t want them to mess with existing model.” – Rich Schefren– Rich Schefren

Where do you go from Where do you go from here?here?

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PART EIGHT