Comparison of direct and reverse franchises: which is more profitable?
Evgeny Dobrinin compares two types of franchises – direct and reverse, lists the advantages and disadvantages of each option and explains which one is more convenient and profitable to work with today
In recent years, reverse franchising has become increasingly popular. Many companies offer it as a way of cooperation, since this model allows you to trade on large areas at minimal cost while maintaining the growth and reputation of the brand. As a result, the reverse franchise is beneficial for both the parent organization and those who collaborate with it.
Features of reverse franchise versus direct
A direct franchise is understood as the purchase of a rights package from a franchisor and the cloning of a head office. In the opposite case, the situation is somewhat different: the franchisor has products, a plan for starting a business in the regions, but there are no funds for expansion, which makes it dependent on the investor. The task of the latter is not only the investment, but also the opening of an enterprise, the selection of a director and premises for rent, as well as the conclusion of an agreement. In this case, the franchise seller must have free people called the “launch team”. They are required to go to the franchisee, engage in on-site recruitment and training, and in the future, verify the results of their activities. Such a team is necessary with the reverse franchise scheme.
The reverse franchisee is required to have an investment and one manager. And the franchisor, in turn, owns a trademark and is engaged in control, as mentioned above, this is entrusted to a specially trained team. In Russia, there are still very few organizations operating under a reverse franchise, tens of times less than a direct one.
The reason is that for the brand owner, reverse franchising is more complicated than direct franchising, as it requires active intervention in the processes and constant monitoring. But for the buyer of the franchise, that is, the franchisee, the reverse scheme is much simpler than the traditional one. That is why it can be considered as a reliable option that reduces risks when investing. The main advantage of this method of investing and doing business is complete security for the franchisee.
More on reverse franchises
After a certain period of time, the owner of the brand pays the franchisee the funds – a percentage of the profit. It turns out that with a relatively small amount of money invested, you can start your own business without paying a lump-sum payment and royalties. And business management will be handled by professionals, because such a scheme is relevant even for beginners in entrepreneurial activity. However, in this case, it is worth considering all possible risks, analyze the target audience of the product and its relevance to the region where the opening of the point is planned.
It is important that in cooperation with the reverse franchise scheme, an intermediary, a commercial bank, takes part in transactions. Therefore, business income is accumulated in open financial accounts, and the franchise owner calculates his own remuneration and the cost of production. He gets the difference between them, but it is also necessary to postpone it from doing business. Reverse franchising income is small, but regular and stable, you won’t have to face competition, and promote your own brand too. The total profit can reach 30 percent, which cannot but rejoice with such a safe scheme.
The franchisee will be controlled by a special program that monitors activities, deliveries of goods and, of course, income. All this allows the franchisor, if necessary, to intervene and direct the work in the right direction for more productive entrepreneurship.
Why is a reverse franchise good?
We list the main advantages of this method of cooperation:
The investment is made under the terms of business control by the franchisor;
The franchisee invests in the development of the company, but should not be engaged in financial management, this process is in the responsibility of the parent organization;
The franchisor provides marketing support on conditions that are discussed separately;
The franchisee earns a percentage of completed sales;
Risks and investments are minimal compared to the usual franchise and purchase of securities;
You can avoid the mistakes typical of novice entrepreneurs and get help in opening a point, purchasing products and controlling profits.
If you describe the reverse franchise model briefly, the business owner receives a reward for his services, but other income goes to the franchisee. As a result, such an investment is not only safe, but also very profitable, despite the fact that there is no need for active business and even ownership of the basics of entrepreneurship.