Types of Franchises

Types of Franchises
There are 5 basic types.

  1. Product Distribution franchise.
  2. Business Format franchise.
  3. Product or Trade Name franchise
  4. Manufacturing and Production franchise.
  5. Conversion franchises.

1. Product Distribution
Here the franchisor is usually a manufacturer who sells a product to the franchise dealer or franchisee. Franchisees are granted the right to distribute the manufacturer’s product within a specified area using the manufacturers name and other methods in exchange for a fee and royalties. A good example of this is a petrol station.

2. Business Format

Here the franchisor owns and licences out a business format to a franchisee. The format would consist of operating systems, trademarks and marketing methods etc. This franchise is where the Franchisor owns the right to the name or trademark, or system, and sells that right to a Franchisee to use. The Franchisee would then set up his/her own operation under more relaxed guidelines and control by the Franchisor.

The franchise may or may not involve an actual product as it is more a method of conducting business. Some examples are mechanical repair, home tune ups, bookkeeping systems, employment agencies etc.

Many franchisors choose this method when looking at expanding their business. They decide to refrain from developing the business in the normal way and instead would grant a licence to allow others to use their system or ideas.

Another name for this type is a System Franchise because it involves the provision of an entire system including marketing and management. In this type of franchise, each franchisee should run the business the same way as all others and their business would look the same as the next franchisee in the group.

The main characteristics of a format franchise are:

  • Grant of a licence.
  • Franchisor owns the name, trademarks and processes.
  • There are regulations and controls imposed on the franchisee.
  • The franchisee pays a franchisor for the right to operate the system.
  • The franchisor can take an extra return in the form of a royalty based on turnover.
  • Full support is given to help the franchisee work the franchisors system.

3. Product or Trade Name

These franchises involve an ongoing relationship between the two parties, i.e. the Franchisee and the Franchisor. These franchises provide the total package. This package may include all the normal services plus supply of products, systems, product training, site selection, staff training, marketing know how and sometimes financing. For a business owner who simply brings in capital, plus the desire to succeed and work hard, this type of franchising would be most suitable because everything is complete and ready to go.

4. Manufacturing and Production

This is an arrangement where a franchisor provides an essential ingredient or know how in the process or manufacture of particular products. They are a type of franchising which involves the conversion of independent dealers or those people that are not affiliated with the franchise to come in and be part of the group. Existing businesses have to be prepared to surrender their degree of independence and pay a fee in order to gain a stronger identity by being part of a successful group.

5. Conversion Franchises

Conversion franchising is a different type of franchising that involves the conversion of independent dealers or unaffiliated businesses to franchises. Existing businesses are prepared to join and surrender some of their independence (plus agree to pay fees etc) in order to gain a stronger identity and obtain a better economic advantage through the purchasing power of the group. A good example of conversion franchising is the real estate brokerage networks such as Century 21 and ReMax.

A franchise can therefore involve:

  1. A product (The franchisee acts as a wholesaler or retailer )
  2. A System (The franchisor permits the franchisee to use a unique method of doing business )
  3. A Manufacturing arrangement (The franchisor provides an essential ingredient or know-how )