What Type of Franchise is Best for You?
May 6, 2011 by Kathleen McDonald
Filed under Resources
Franchising is a multibillion dollar industry representing hundreds of large and small local and international brands representing dozens of business categories. Trade names such as McDonald’s, Intercontinental Hotels, Pepsi and Mothercare are easily recognized in the marketplace.
But do you know the type of franchise each of these brands represents?
Franchising involves a sharing of responsibilities between 2 parties in a commercial transaction. These 2 parties enter into a legal agreement to develop and execute a business concept. The franchisor and the franchisee – the 2 parties - assume specific duties in this long term relationship. The franchisor develops and promotes the business concept; the franchisee acts as the distributor for the concept in a designated market.
In creating the business concept, the franchisor must design, develop and test its product or service. The franchisor defines a marketing strategy, the implementation of which is conducted through its network of franchisees. The type of product or service offered, and the degree of control that the franchisor requires of its franchisees, determines the type of franchise business model associated with the brand.
There are 2 types of franchise models. The first is the business format franchise; the second is product franchise. Each is structurally different but widely used and hugely successful.
Most franchises operate within the business format model. Examples include fast food and specialty restaurant chains and other retail franchise businesses. In this model franchisors provide franchisees with a management system and a licensed trade name. This system specifies operating standards which are critical to the day-to-day activities of the franchise business. Franchisees receive initial and on-going training in the proper implementation of these procedures and are required, according to the terms of the franchise agreement, to adhere to these standards. In return for the license and instruction in operations, the franchisee pays both an initial franchise license fee and monthly fees.
The second franchise model is the franchise product model. The franchise product model does not require a standardized operating system. A franchisee is granted access to the trade name through a license. This trade name identifies the product; examples of which include an automobile or a beverage brand. The franchisor manufactures and sells the product to franchisees who then resell the product to consumers. Franchisees pay an initial fee to the franchisor to acquire the license and are required to purchase product exclusively from the franchisor and meet specified sales goals.
When evaluating a franchise, it is important to identify the type of franchise business model used by the franchisor. Determine if this is the type of business which is of interest to you and if the franchise suits your needs and interests. Once these questions are addressed, a prospective franchisee can better understand their requirements which will impact their selection of a franchise opportunity.
Next Month: What Services are Franchisors Required to Provide Franchisees?
