Before investing money in a franchise, budding entrepreneurs scout for best business models which will work for them the best
Franchising is an excellent avenue to explore while starting a business. Before investing money in a franchise, budding entrepreneurs scout for best business models which will work for them the best. While doing so, the question which arises in everybody’s mind is that which franchise model will bear more benefit? How are the models different? What are the pros and cons? If you are one of them, then fret not, we have got you covered.
Franchise Business Models
There are majorly five business models namely,
- COCO (Company Owned Company Operated)
- FOCO (Franchise Owned Company Operated)
- FOFO (Franchise Owned Franchise Operated)
- COFO (Company Owned Franchise Operated)
- FICO (Franchise Invested Company Operated)
Generally, a company begins with COCO model, and after the brand is well-established, the company get into a franchise model to expand its footprints. While every franchise model works according to the company, the most prevalent ones are FOFO and FOCO models.
FOCO vs FOFO Model
- Franchise Owned Company Operated
In the FOCO model, the initial set up cost is born by the franchise. The running cost is borne by the company and in return, franchisee gets a minimum guarantee or percentage of revenue earned. The franchise is the owner of the business, and the company will be responsible in operating it and taking care of all the things necessary to run an outlet, such as Marketing, Advertising, Logistics, Electricity, Staff wages, rent etc. The company will also have to give a fixed percentage of profit shares to the owner of the franchise.
- Franchise Owned Franchise Operated
In the FOFO model, the company basically rents out the brand to the franchise for a particular non-refundable sum and for a pre-agreed time period. Prices and merchandising are decided by the company. Though, the company provides the few things similar to FOCO model, say marketing in national media say print and electronic. But, this model franchise is the owner of the store, so all the operational cost has to be borne by the franchise itself. The Franchise has to provide an assured of minimum guarantee or percentage share of revenue to the company.
Which Is the Better Franchise Model?
Every model has its own pros and cons. But, FOCO models turn out to be a win-win situation for both the franchise and the brand. In the FOCO model, since the operational cost is borne by the brand, the franchise can focus their energies on the promotion and sales, leaving the operation and logistics to the brand company. It also allows the brand to run the outlets without the franchisee’s intrusion and get revenues timely.
While aspiring entrepreneurs who have a large sum of amount in their account to invest in opts for FOFO model. While FOFO model of expansion is not preferred by many brands. This is because, after a year or so, the franchisees tend to take hold of things and doesn’t adhere by company policies, causing a decline in the brand value. As a result, the return of investment (ROI) which is usually assured to three years extends to five. In the wake of this, the Company either levies fines or pulls out from the contract eventually closing the franchisee business.
FOCO model is therefore considered a notch above other franchise models, as it poses minimal risks to both the brand and the investor. It is a partnership model and can turn out to be the right pick for the first time entrepreneurs and franchisees.