Four Kinds of franchises
Franchises are confusing. Franchising is defined as, “a method of doing business through granting a license to individuals or groups to perform specific commercial activities”. Consequently, franchisors and franchisees form a relationship that benefits both parties through expansion of the brand and local operation. Furthermore, activities of a franchise vary from business to business and depend upon the type of product or service involved.
With this in mind, it is helpful to define two common terms for purposes of this article.
- A franchisor grants rights to others to do business using their business processes, brand and trademarks.
- A franchisee buys the rights to use the franchisors trademarks, brand name, and systems.
Business Format Franchises
The majority of franchises in the U.S. are 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.
Accordingly, this license gives the franchisee the following rights and benefits:
- Right to sell a franchisor’s service or product.
- Right to use franchisor’s trademark and brand name
- Right to conduct business using the franchisor’s operation manuals, systems, and processes.
While the franchisor benefits from:
- Business expansion with less capital outlay
- Receiving ongoing royalty payments
- More units equal higher brand recognition
In exchange for the benefits above, a franchisee pays an upfront fee and an ongoing royalty fee. Subsequently, the franchisor grants the systems to operate the business to the franchisee. Of course, a franchisee is required to operate according to the franchisor agreement.
Types of business format franchises
The most common types of business format franchises are restaurants. This includes (quick service and table), lodging, business services (examples: printers, signs, financial services) and personal services (hair salons, healthcare, spa) franchise.org.
When visiting a franchise, customers expect to find a certain quality of product or service because of brand name reputation. As a result, consistency in food and services is one great advantage of franchise operations.
To sum it up, the franchisee is paying for the rights to use the franchisor’s systems, brand, training, and support. In exchange they are granted a license to do business using the franchisors systems. The business is typically 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 are often called “Job franchises”. Thus, job franchises are often home-based, low investment, and may involve a mobile service. For example, travel planning, janitorial, lawn care, home maintenance, and business consulting could be considered 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 provide an entire system to run the business. A common type of product distribution franchise 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 include tires, lawn tractors, paint, and vending.
Film or Media Franchise
In the third place, a series of films or movies are known as film or media franchises. For instance, Harry Potter, Star Wars, and Batman are all film/movie franchises. Film companies grant theaters rights to show the movie or broadcast it on television. Of course these rights are granted through licensing agreements.
Furthermore, 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. Examples are toys, games, books, and posters.
The fourth type of franchise is a Sports Franchise. 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, team owners 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. For this reason, each team in the league is considered a franchise. Licensing agreements give distributors the right to manufacture and sell products associated with teams.
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 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.
Keep in mind that all franchises require some type of agreement between franchisor and franchisee. Consequently, these agreements are legal and binding.
When 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.
This article is updated and partially excerpted from Franchising Without Fear, by Trish Benedik
Trish Benedik is the owner of Select Franchise Consulting. She helps narrow your options and find the franchise that is the right fit for you saving you time and frustration. Even more, 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. For these reasons, you should conduct due diligence, talk with current franchisees and get to know the franchisor before signing an agreement.