Franchising has become a very popular form of business. Depending on the type of franchise agreement one can find themselves in a ready-made business or market with customers to boot. The savings in teething costs along the learning curve can be massive for someone who chooses to buy into a franchise business as opposed to starting from scratch. Franchising is a business concept used in fast food, home appliances, car sales, hospitality, sport and many other industries.
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What is franchising?
Franchising is a business model based on a marketing concept which can be adopted by an organization as a strategy for business expansion. Where implemented, a franchisor licenses its know-how, procedures, intellectual property, use of its business model, brand, and rights to sell its branded products and services to a franchisee for a fee. The fee involved and the frequency of payment depends on the type of franchise agreement the two parties enter into. All in all, there are six types of franchise agreements namely product franchise, business format, joint venture, conversion, regional master and master franchises. Let’s look at each of these franchise types with examples.
Product / Trademark Franchise
In this type of franchise, a franchisor provides a product and/or corporate identity to a franchisee. The franchisee gains the advantage of selling products that are already established in the market with existing goodwill. The franchisee pays for the products outright. If the type of franchise also involves brand identity, the franchisee will pay licensing fees, advertising fees and branding fees to use the trademark images of the franchisor. The fee structure is so because in this type of franchise the franchisee benefits from the goodwill that the franchisor has built up in the market. The identity and advertising of the franchisor, as well as the products, are a benefit to the franchisee. Product and trademark are commonly used together in fast food franchising. Hotels and Restaurants more commonly use trademark alone while beauty brands such as Avon use the product franchise in a network marketing setup.
Business Format Franchise
In business format type of franchising, the franchisee pays for the plans, setup, manuals and other operational knowledge of the franchisor. Compared to the trademark franchise which gives identity, the business format franchise passes on trade secrets. The franchisee benefits from having a ready-made system that has been proven to work. This means they save a lot of time and money in trying to figure out what works and get straight to the business of serving customers. The amount of information that the franchisee is equipped with varies in degree and extent depending on the industry and how deep the franchise relationship goes. Hotel chains are the best example of the business format franchise type. A hotel owner or manager agrees with a hotel chain to use their business methods and pays a regular fee. In hotel chains, it usually combined with the trademark franchise.
The joint venture franchise type is somewhat of a part franchise. In this type of franchising, the franchisor agrees with a partner to create a franchise that is a joint venture. This partnership will operate with the methods and trademarks of the franchise in most cases and differs only in ownership and control. There are a few reasons why a franchisor would prefer this sort of arrangement. The franchisor may want to maintain tighter control of the franchise and use the stake to maintain control over the business decisions of the individual franchise. It may also be a risk management mechanism where the franchisor wants to branch out but may have reservations about putting up 100% of the capital. It is not just about the money, partners in joint venture types of franchise can enter through contributing strategic location real estate or other critical infrastructure. This happens in fuel service station franchises for example.
The conversion type of franchising happens where a business that is already operating is brought into a franchise agreement and is given the products, trademarks and/or business methods of the franchise. This type of franchise distinct from the aforementioned franchise types in that it takes a business that is already running and operating and brings to it the goodwill of the franchisor. This benefits the franchisee because they open up to new customers through the recognition they receive from the products and branding of the franchise. The franchisor benefits because the business is already operational and hopefully profitable. This is a guaranteed income stream for the franchisor, unlike a new business which may or may not work out. This type of franchising is popular in the entertainment industry through bars, pubs and night clubs.
Regional Master Franchise
In a regional master franchise, the franchisee signs an agreement that appoints them the representative of the franchise in a state or province. In this territory, the franchisee can then set up their franchises or enter agreements with other sub-franchisees. It is a simple type of franchise but complicated versions of it can come into existence. The regional master is a very popular franchise type. The Tupperware company is perhaps the best example that can be easily grasped. Tupperware goes into an agreement with a regional master who sets up a Tupperware branded shop where they sell Tupperware and host training and other Tupperware events. They can sell Tupperware products to the general public. They also act as a distribution centre in the territory for those who are Tupperware agents (sub franchises).
The master franchise is similar to the regional master franchise, a franchisee, in this case, represents the brand in a country. Much like the regional master type of franchise in the master franchise the franchisee can set up sub-franchise agreements with other parties. So the Master Franchisee acts as a franchisor in the country. The agreement may go as far as to give them distribution responsibilities similar to the regional master. What sets this apart from the regional master is not just the geographical area of responsibility. Master franchises are also responsible for the development of the product in the market. They will be responsible for advertising, market testing, market research and other marketing activities. This type of franchise is more popular than you think. Fast food franchises employ this heavily. McDonald’s, KFC and Subway are very good examples of this. A master franchise is set up in a target country and they sub-franchise with the outlets. They handle local marketing, research and product distribution. So in most countries, you will have a Master franchise of these brands that sub franchises the stores you visit.
The main types of franchising we have identified can be combined in whole or part to create hybrid franchise types. The various franchise types are identified by ownership structure, what the agreement entails and rights and responsibilities of the franchisor and franchisee contained in the agreement.