Different Types of Franchise Business Models

A franchise can be defined as a license that is granted by a brand owner, known as the franchisor, to an individual or a corporate, known as a franchisee, to access business proprietary knowledge, process, and trademarks and to sell products or services under the brand name within a specified territory or region.

The franchisee gets access to a few things from the owner to conduct business.

• To operate under the franchisor’s brand name.
• Use of the franchisor’s trademarks.
• Operations Manual.
• Marketing support from the franchisor.
• Software and other operational requirements depending on the nature of the business.
• Relevant proprietary knowledge and materials.

How Does a Franchise Operate?
Types of Franchise Business Models
Company Owned Franchise Operated (COFO)
Franchise Owned Company Operated (FOCO)
Franchise Owned Franchise Operated (FOFO)
Hybrid Franchise Model

How Does a Franchise Operate?

Generally, a franchise business is fairly simple. A franchisee purchases a licence to operate a business using the franchisor’s proprietary knowledge, process, trademarks, and brand name. The licence cost depends upon the size of the business, its brand goodwill and the demand for its products. Apart from this initial investment, the franchisee is also required to pay an ongoing annual royalty, which is usually a certain percentage of annual gross sales.

The business processes and operations of a franchise are defined by the operations manual and is a part of the franchise contract. The franchisee is required to uphold the terms and conditions of the contract and maintain set standards of hygiene, quality, visual merchandising, products, pricing, offers, etc.

Types of Franchise Business Models

There are essentially three different types of franchise business models:

1. Company Owned Franchise Operated – COFO
2. Franchise Owned Company Operated – FOCO
3. Franchise Owned Franchise Operated – FOFO

The type of franchise model that a brand offers is dependent on the nature of the business. Of course, there are associated advantages and disadvantages of each one.

Company Owned Franchise Operated (COFO)

The company invests in the franchise business, which then runs it as per the guidelines issued by the company. This model of a franchise business is not very common, as companies that invest in expanding their operations through a franchise model usually prefer to operate it themselves. One example of a COFO business model is call centres that handle phone calls for the company.

Advantages of the COFO Model

• The operational expenses are borne by the company.
• The productivity and efficiency of employees is high as the outlet is managed by the entrepreneur.
• The company has the advantage of opening outlets where it is otherwise difficult to find franchisees.

Disadvantages of the COFO Model

• The customer experience is dependent on how the franchise chooses to manage its operations. It can harm the company’s goodwill if it is not managed properly.
• In the event of the franchisee exiting the contract, it can leave the company with no alternative.

Franchise Owned Company Operated (FOCO)

In this type of model, the franchisee owns the property and is responsible for all the resultant additional capital expenditure. The daily operations of the store or the outlet are managed by the franchisor. A prime example of this type of franchise model is Bistro 57.

Advantages of the FOCO Model

• The end customer experience is controlled by the company or the brand and hence better in quality.
• The expenses are well distributed as the company does not pay for the set-up expenses and the franchisee does not pay for the operational expenses.

Disadvantages of the FOCO Model

• It is not a suitable option for property owners who want to rent their properties.
• It is a continuous, collaborative business model, and the franchisee has no say in the day-to-day operations of the business.

Franchise Owned Franchise Operated (FOFO)

The term is self-explanatory in which the company allows the franchisee to use its brand name, process, and trademarks in its franchise outlet. The contract involves a non-refundable franchise fee and is for a pre-determined period, which can then be renewed. The product price is decided by the brand, and the franchise owner bears all the operational costs of the store. The franchisee is required to pay an annual royalty, which is essentially a percentage of the profits to the company. This is the most popular type of franchise model that is used in the market.

Advantages of the FOFO Model

• There is a wide variety of business and franchise opportunities available.
• A successful franchise operation translates into an excellent return on investment.

Disadvantages of the FOFO Model

• This model of the franchise has a higher percentage of failure in comparison to the others.
• The return on investment in this type of franchise model may not be very high due to the higher investments and fees.

Within the FOFO type of franchise business model, there are two variations –

Stock purchased by the Franchise

This Franchise Owned, Franchise Operated business model works with brands by purchasing the stock from the brand and then selling it to the end consumer. There might be a contractual clause between the parties to return a part of the unsold stock and purchase new stock.

Franchise Outlet Stocked by Brand

This franchise model, while being owned and operated by the franchise owner, receives stock on a consignment basis. The brand provides the merchandise as per their indent to ensure a correct representation of the stock in the franchisee outlet.

Steps to start franchise business

Franchising is the way ahead for most of the businesses. Franchise business grow faster than any other start-up as the starting up franchise is quite inexpensive.

StartupTalkyAditi Chawda

There is a fourth variation which is not really a franchise model but is called Company Owned Company Operated (COCO). Just as the name suggests, the store unit is owned and run by the brand. The outlet is entirely funded by the brand and run by the employees of the brand. Some examples of a COCO model are Reliance JioMart and Big Bazaar.

Advantages of COCO

• The brand earns and keeps the total profits as there are no channel partners to share.
• The company can expand into geographical locations where franchises are difficult to find.
• A COCO model allows the company to showcase its outlet and product range.

Disadvantages of COCO

• The only major disadvantage is that the company spends monetary and manpower resources on activities that are not its core business.

Hybrid Franchise Model

This is a relatively new concept within the parameters of the franchise business model. It combines physical and digital franchises where traditional enterprises are digitally turned into multi-functional hybrid franchise platforms.

This type of franchise gives the franchise owner scope of expansion while working within the concept and structure of a larger corporation. This business model can include running a brick-and-mortar store while also keeping an internet store and employing catalogue sales to generate orders via mail.

Conclusion

A franchise business model is a great option for a new and budding entrepreneur as the systems and operations are already set. The base platform is ready for the entrepreneur to then focus on expansion and building a customer base within their geographical boundaries.

FAQs

What is a franchise?

A franchise can be defined as a license that is granted by a brand owner to an individual or a corporate entity to access business proprietary knowledge, process, and trademarks and to sell products or services under the brand name within a specified territory or region.

What are different franchise business models?

Different franchise business models are:

• Company Owned Franchise Operated – COFO
• Franchise Owned Company Operated – FOCO
• Franchise Owned Franchise Operated – FOFO
• Company Owned Company Operated Model – COCO
• Hybrid Franchise Model

What is a hybrid franchise business model?

The hybrid franchise business model combines physical and digital franchises where traditional enterprises are digitally turned into multi-functional hybrid franchise platforms.