4 Kinds of franchises
Franchises can be confusing. Franchising is known as a method of doing business through granting of a license to individuals or groups to perform specific commercial activities. The franchisor and franchisee form a relationship that benefits both parties through expansion of the brand and local operation. The activities of a franchise vary from business to business and depend upon the type of product or service involved.
It is helpful to understand two common terms for purposes of this article.
- A franchisor is a person or company that grants the rights to others to do business using their business processes, brand and trademarks.
- A franchisee is an individual or group who buys the rights to use the franchisors trademarks, brand name, and systems.
Business Format Franchises
In 2016, there were more than 800,000 franchises in the United States and, 88% of them were Business format franchises. (“The Economic Impact of Franchised businesses” franchise.org)
A business format franchise grants the franchisee a license. The license gives the franchisee the following benefits:
- The right to sell the franchisor’s service or product.
- The right to use their trademark and brand name
- The operation manuals, systems, and processes to conduct business.
The franchisor benefits by:
- Business expansion with less capital outlay
- Receiving ongoing royalty payments
- More units equal higher brand recognition
The franchisor grants the entire systems to operate and market the business to the franchisee. The franchisor requires that the franchisee operates according to their written systems and procedures. The franchisee pays an upfront franchise fee and an ongoing royalty fee. In exchange, they are granted the rights to the systems, brand name, trademarks, training, and support of the franchisor.
Types of business format franchises
The most common types of business format franchises are restaurants (quick service and table), lodging, business services (examples: printers, signs, financial services) and personal services (hair salons, healthcare, spa) franchise.org.
Consistency in food and services is one great advantage of franchise operations. When visiting a franchise, customers already expect to find a certain quality of product or service because of the brand name reputation.
To sum it up, the franchisee is paying for the rights to use the franchisor’s systems, brand, training, and support in exchange for a license to do business using their systems. The business is usually tied to a specific territory and performs according to the specifications set forth in the franchise agreement.
Within the realm of business format franchises, many businesses are opened by individuals who desire to change their career. These franchises are often home-based, low investment, and may involve a mobile service. Examples that fit this type of business are travel planning, janitorial, lawn care, home maintenance, and business consulting. Some people call these job franchises.
Product Distribution franchising
The second type of franchise is the product distribution franchise. These franchises fall into a supplier-dealer relationship. A product distribution franchise obtains a license to distribute a product or supply a service to others. The key difference between a product distribution and a business format franchise is that the franchisor does not usually provide an entire system to run the business. The most common type of product distribution franchises is automotive/truck dealers and gasoline stations (franchise.org). There are many other product distribution franchises that operate on a smaller scale. Other examples of product distribution franchises are tires, lawn tractors, paint, and vending.
Film or Media Franchise
A series of films or movies are known as film or media franchises. Harry Potter, Star Wars, and Batman are all film/movie franchises. The film companies grant the theaters the rights to show the movie or broadcast it on television. Rights are granted through licensing agreements.
Media franchises include copyrighted works such as books, musical recordings, and video games. These licenses are granted for the use of the media and characters in other products, for example, toys, games, books, and posters.
A sports franchise is an ownership structure in professional sports in which a league is limited to a fixed number of teams (Oxford dictionaries). To avoid competition, owners of a team are granted territorial rights. The National Football League (NFL) and the National Basketball Association (NBA) are two well-known sports leagues in the United States. Each team in the league is considered a franchise. Licensing agreements give distributors the right to manufacture and sell products that are associated with the team.
Franchising is a network of interdependent business relationships.
Through this network a number of people share:
- A brand identification and a legally binding right to market a product or service using the trademark name
- A successful and proven method of doing business
- A proven marketing, administrative and/or distribution system
There are basically 4 common types of franchises. The most widely used is the business format franchise. Business format franchises consist of Quick Service Restaurants, Home Health Care, and over 70 other categories of franchises. Over 80% of the franchises in the United States are Business Format Franchises. Another type of franchise is the product distribution franchise. Car and truck dealerships and gasoline stations are examples of product distribution franchises. The third type of franchise is the film or media franchise. Intellectual property, film, books, songs, and art are part of the film or media franchise and require a license to obtain permission for their use. The fourth type of franchise is a major league sports franchise. All franchises require some type of agreement between franchisor and franchisee. These agreements are legal and binding.
If purchasing a franchise, be sure to look carefully at the agreement and obtain legal and financial advice before making a commitment. Knowledge and education are powerful tools when making a life-changing decision such as opening a business.
Trish Benedik is the owner of Select Franchise Consulting. We will help narrow your options and find the franchise that is the right fit for you saving you time and frustration. Our consultation will help you make an informed decision.
There are thousands of options in franchising. Be sure to consult professionals to find the one that is a good fit for your business and lifestyle goals. Conduct due diligence, talk with current franchisees and get to know the franchisor before signing an agreement.