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Comparison of direct and reverse deductibles: what is more profitable?

Eugene 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-scale territories 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 work with it.

Features of the reverse franchise compared to the direct one

A direct franchise is understood as buying a package of rights from a franchisor and cloning the head business. In the case of the reverse, the situation is somewhat different: the franchisor has products and a plan to launch a business in the regions, but there are no funds for expansion, which is why it depends on the investor. The task of the latter is not only to invest funds, but also to open a company, select a Director and premises for rent, and conclude a contract. In this case, the franchise seller must have free people called the “launch team”. They are required to go to the franchisee, engage in hiring staff on the spot and training them, and in the future, check the results of their activities. This command is necessary for reverse franchising.

The reverse franchisee is required to have an investment and one managing person. And the franchisor, in turn, owns the trademark and is engaged in control, as already mentioned above, this is entrusted to a specially trained team. In Russia, there are still very few organizations that work on the reverse franchise, ten times less than on the direct one.

The reason is that for the brand owner, reverse franchising is more difficult than direct franchising, since it requires active intervention in processes and constant monitoring. But for the franchise buyer, 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 funds. The main advantage of this method of investing and doing business is complete security for the franchisee.

Learn more about the reverse franchise

After a certain period of time has elapsed, the brand owner pays the franchisee a percentage of the profit received. It turns out that if you invest a relatively small amount of money, you can open your own business without paying a lump-sum fee and royalties. And business management will be handled by professionals, because this scheme is relevant even for beginners in business. However, in this case, it is necessary to take into account all possible risks, analyze the target audience of the product and its compliance with the region where the point is planned to open.

It is important that when working under the reverse franchise scheme, an intermediary — a commercial Bank-takes part in transactions. Therefore, the income from business activities is accumulated in open financial accounts, and the franchise owner calculates his own remuneration and cost of production. It gets the difference between them, but it also needs to be set aside for doing business. Revenue from reverse franchising comes out small, but regular and stable, you will not have to face competition, and you will also have to promote your own brand. The final profit can reach 30 percent, which is good for such a secure scheme.

The franchisee will be monitored by a special program that tracks activities, product deliveries, and, of course, revenue. All this allows the franchisor, if necessary, to intervene and direct the work in the right direction for a more effective business.

What is good about a reverse franchise?

Let’s list the main advantages of this method of cooperation:
The investment is made under the control of the business by the franchisor;
The franchisee invests in the development of the company, but should not be engaged in financial management, this process is the responsibility of the parent organization;
The franchisor provides marketing support on terms 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 mistakes that are common to start-up entrepreneurs, and get help in opening a point, purchasing products, and controlling profits.
If you describe the reverse franchise model briefly, the business owner is rewarded for their services, but the 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 to actively conduct business and even own the basics of entrepreneurial activity.

Disadvantages of a reverse franchise compared to a direct one

Of course, reverse franchising has a number of disadvantages compared to a regular franchise. These include the inability to control the product range, make important decisions, and influence your own profits. There is also always the risk of bankruptcy of the subsidiary and the risk of termination of the contract with the owner of the main brand. But, despite this, reverse franchising has proved to be a good investment option. It should be recommended to those who are looking for ways of stable income without much effort. The reverse franchise is especially popular in the trade of clothing, footwear and accessories, products, appliances and furniture. From the service sector, it is used by Internet services, cafes, restaurants and mobile operators.

As a conclusion, a direct franchise gives more freedom in conducting business, but also carries more significant risks. While the reverse franchise requires less intervention and is suitable even for beginners in the business field, however, as an investment option, it has almost no risks. To choose one of the two options, you need to weigh all the pros and cons, evaluate your own capabilities and business experience.
© Business world

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