The concept of a business licensing their product to a third party in order to build their brand has been in implementation for a lot longer than you may think. You may be currently looking into opening a franchise through a franchisor or you may be a business looking to offer the possibility of franchising your product. Whatever your situation may be, it is important to understand some key concepts of franchise ownership or leasing as well as consider the important franchise revenue model that is placed between the franchisor and the franchisee.

Identity and Benefits

Many businesses start offering franchise ownership when demand is high and there is opportunity to grow in more places. This also gives prospective business owners the ability to buy into a successful business model while relieving some of the more stressful parts of business ownership. The franchise revenue model is set in place to benefit the franchisor and the franchisee in such a way that there Is revenue and profit for both parties with less risk involved for both. The owner must grant the right to use their business model and infrastructure. In return, the franchisee will do what is necessary to follow the contract and help the business to grow.

Revenue Recognition

As the franchisor and future client begin to draft a contract between each other, it is necessary to follow the steps of revenue recognition for franchisors. The first step is to identify the contract, where there will be an agreement in place where the rights, obligations, and payment terms will be laid out in full. The next step would be to identify the obligations between the two parties in the contract, including what can and cannot be done with the brand and the practices within the business.

Once the contract has established the agreements and obligations, there will be a specific price that will be collected from the franchisee, including everything up front as well as fees overtime. Assets in the franchise will be assessed as well as the cost margin and residual approach. The franchisor will then have the obligation to provide the good or service to the franchisee in order to generate the revenue for both parties.

Consider This Final Thought

If you are a franchisor looking to franchise their services, be sure to consider all your options and have a clear franchise revenue model in place. For prospective business owners looking to open a franchise, consider finding a good candidate. This would include a franchise that offers a good model that is easy to replicate.

Franchising could be a lucrative opportunity for both the franchisor and the franchisee, but it is important to lock down all the important details before signing a contract between either party. Either way, try and keep an open mind and be sure to do all the necessary study to get started on the right foot.