Franchise 101 - Franchise Models

What is Franchising?

Franchising is a business agreement between two parties - a franchisor and a franchisee. It is the practice of benefitting from a firm’s successful business model. A business owner in this scenario would be a franchisor who allows independent outlets to market and sell their products or services. The franchisee and the franchisor normally agree on a fee and the management system of product distribution which may includes:

• An upfront payment by the franchisee

• On-going royalty fee given to the franchisor and certain percentage of the total revenue generated

• Franchisor gives the franchisee rights to use their product and run a business under their trademark brand name

There are Typically Two Types of Franchise Models

1. Business Format Franchise

This is the most common type of business franchise used, as in this type of franchise, the franchisee benefits from the franchisor’s brand name and trademark. Although, the agreement between franchisee and franchisor can vary but in most cases the franchisee runs the business as per the management system of the franchisor. Basically, the franchisee obtains rights to use the franchisor’s intellectual property while both franchisee and the franchisor benefit from it. This type of franchise mostly helps the franchisor in terms of his brand name spreading across the market. Since the franchisee has the right to use the franchisor’s brand name and trademark, the franchisee receives complete training and the management, recruitment and advertising is operated as per the franchisor. A common example of a Business Format Franchise would be a fast food outlet such as McDonalds.

2. Product Distribution Franchise

The second type of franchise is Product Distribution Franchise in which the franchisee gets in an agreement with the franchisor to sell their products. Most common example of this type of franchise would be automobile, petroleum or distribution of drinks. In this type of franchise, the franchisor gives full rights to the franchisee to use their logo, trademark and marketing techniques however this franchise does not obligate the franchisee to pay ongoing fees to the franchisor.

Based on these two business franchise models, there are 5 different types of franchises a franchisee could choose from depending on the type of industry sector he is into. Here are the 5 types of Franchises:

Types of Franchises

1. Management Franchises –

In a Management Franchise, the franchisee will need to market and operate the business. The franchisee’s employees are trained as per the standards and then the job is carried forward by the respective staff. This type of franchise is operated from a regional or geographic head office. The owners of management franchise use their experience to control the staffs that handle the tasks assigned at the job.

To operate a Management Franchise, the franchisee will:

• Sell a product or a service

• Will need to rent or own an office premises

• Hire and train capable employees

• Market and manage business during agreed business hours

• Will need to deal with mainly businesses than individual dealers

• Will be responsible for running, Managing and maintaining the franchise

2. Retail Franchise –

This type of franchise is solely dependent on selling products or service to individual customers. The owner rents or owns a property to run the business for walk-in retail. This franchise benefits from customers and generates revenue accordingly. In this type of franchise, the franchisee has overall control over retail but all the products and services are to be approved by the franchisor before selling.

To operate a Retail Franchise, the Franchisee will:

• Needs to choose the right location to run the business and form a strong customer base

• Likely to set up the business at a high street premises to run the retail successfully

• Need to sell products or services to customers directly

• Market and manage retail during business hours

• Sell and display products approved by the franchisor only

• Franchisee will be responsible to hire and manager employees

• Franchisee will need to focus on customer base as most of the revenue will be generated through walk-in customers

3. Investment Franchise –

This franchise type requires the franchisee to invest a significant amount of money into the franchise. The business that could be categorized under this franchise is hotels, restaurants, fast food chains etc. The franchisee possesses overall control and works very closely with the operation of the franchise. The franchisee is responsible to employ and manage staff as well.

To operate an Investment Franchise, the Franchisee will:

• Invest money into the franchise

• Put together a qualified team of employees to generate revenue

• The franchisee will invest but not work at the franchise

• To run a huge management business, the franchisee must be experienced in handling a huge team

4. Single Operator Franchise (Executive) –

This type of franchise is managed and carried out by the franchisee personally. This could be selling of products but it is mostly based on rendering services in terms of consulting and other form of professional services. The franchisee has the choice to run this business from home or through an office. Examples of work that are common in this category are tax advice, training & coaching, business consulting service, book keeping service etc.

To operate a Single Operator Franchise (Executive), a Franchisee will:

• The franchisee will need to seek training himself as this type of franchise is usually service based

• This type of franchise usually requires the franchisee to work himself but he/she are free to employ staff at a later stage

• Franchisee will need to deal with both businesses and individuals

• Will always need to be available for customers through phone or other means of communication as it is likely to be a service based business

• Work from home or have a small office premises to meet with clients

5. Single Operator Franchise (Manual) –

This type of franchise involves the franchisee to mostly trade or sell products. It sometimes involves selling of services too. This also, could be home based business or a franchisee can operate through an office.

To operate a Single Operator Franchise (Manual), a Franchisee will:

• The franchisee will handle the business alone initially but may employ staff at a later stage if the business grows

• The franchisee will need to excel at the art of trading as he/she will have to sell products or services

• Will need to work from home or have a small office to deal with clients

• The franchisee may have to deal with both businesses and individual clients

Knowing what model and structure the Franchise you are interesting in will help you as the buyer understand what to expect. As a seller or business owner wishing to Franchise the business it is always recommended to have an understanding to which you will be able to make an educated decision about what structure is best for your business.