A strong business model is the most important component of an investment worthy franchise system. The business model is the method or means by which a company captures value from the business and shares that value with its stakeholders.
The business model in Franchising is crucial to establish how the franchise owner, franchisor, vendors, employees, investors and customers gain value from the company. The franchise business model may include many different aspects of the business, such as how it makes, brands, distributes, prices, markets, or advertises its products.
Each and every franchise system has a different business model. The Franchise Disclosure Document (FDD) discloses many business mi. The FDD was not designed to identify the value proposition. It was designed to communicate critical information and legal obligations in the franchise agreement.
The franchise business model is about value creation. It is also about the core strategy to generate economic value for all stakeholders. Understanding the franchise business model is critical in determining whether that franchise system is investment worthy and how capable the franchise can compete in the marketplace and make money.
The franchise business model exposes how the company converts franchisee capital, brand value, and vendors participation into a return that is greater than the opportunity cost of the capital. This means that a franchise business model’s success will create returns that are greater than the (opportunity) cost of capital, invested by its franchise owners, shareholders, and bondholders.
Business models are an essential part of strategy – they provide the fundamental link between markets and the consumers. Any resilient business model must be able to create and sustain returns for its franchise owners and stakeholders over time. Otherwise, it is likely to go out of business or fashion.