What is a Franchise?

A franchise is the agreement or license between two legally independent parties which gives:

  • a person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor)
  • the franchisee the right to market a product or service using the operating methods of the franchisor
  • the franchisee the obligation to pay the franchisor fees for these rights
  • the franchisor the obligation to provide rights and support to franchisees

FRANCHISOR

Owns trademark or trade nameProvides Support:

  • (sometimes) financing
  • advertising and marketing
  • training

Receives Fees

FRANCHISEE

Uses trademark or trade name.  Expands business with franchisors support.  Pays Fees

PRODUCT DISTRIBUTION

TYPES OF FRANCHISES:

Product distribution franchises simply sell the franchisor’s products and are supplier-dealer relationships. In product distribution franchising, the franchisor licenses its trademark and logo to the franchisees but typically does not provide them with an entire system for running their business. The industries where you most often find this type of franchising are soft drinks, automobiles and gasoline.

Some familiar product distribution franchises include:

  • Coca-Cola
  • Goodyear Tires
  • Ford Motor Company

Although product distribution franchising represents the largest percentage of total retail sales, most franchises available today are business format opportunities.

BUSINESS FORMAT FRANCHISE

Business format franchises, on the other hand, not only use a franchisor’s product, service and trademark, but also the complete method to conduct the business itself, such as the marketing plan and operations manuals. Business format franchises are the most common type of franchise.

USA Today reported that the 10 most popular franchising opportunities are in these industries:

  • Fast Food
  • Service
  • Restaurants
  • Building and Construction
  • Business Services
  • Retail
  • Automotive
  • Retail-Food
  • Lodging
  • Maintenance

Some popular business format franchises include:

Fast Food
Wendy’s
McDonald’s
Hardee’s

Health & Beauty
Jenny Craig Weight
Loss
Great Clips
Pearle Vision, Inc.
Auto
AAMCO
Midas
Budget Rent-A-Car
 RetailAthlete’s Foot
Blockbuster Video
Play It Again Sports
Business Services
H & R Block
Signs By Tomorrow
UPS Store
Education
Sylvan Learning
Huntington
New Horizons
Lodging
Comfort Inn
Embassy Suites
Quality Inn
Maintenance
Roto-Rooter
Stanley Steemer
ServiceMaster
Restaurants
Blimpie
Dairy Queen
Outback Steakhouse

TYPES OF FRANCHISE ARRANGEMENTS

Because so many franchisors, industries and range of investments are possible, there are different types of franchise arrangements available to a business owner.

SINGLE-UNIT (DIRECT-UNIT) FRANCHISE

A single-unit (direct-unit) franchise is an agreement where the franchisor grants a franchisee the rights to open and operate ONE franchise unit. This is the simplest and most common type of franchise. It is possible, however, for a franchisee to purchase additional single-unit franchises once the original franchise unit begins to prosper. This is then considered a multiple, single-unit relationship.

MULTI-UNIT FRANCHISE

  • area development
  • master franchise (sub-franchising)

AREA DEVELOPMENT FRANCHISE

Under an area development franchise, a franchisee has the right to open more than one unit during a specific time, within a specified area. For example, a franchisee may agree to open 5 units over a five year period in a specified territory. The franchisor grants the franchisee exclusive rights for the development of that territory.

MASTER FRANCHISE

A master franchise agreement gives the franchisee more rights than an area development agreement. In addition to having the right and obligation to open and operate a certain number of units in a defined area, the master franchisee also has the right to sell franchises to other people within the territory, known as sub-franchises. Therefore, the master franchisee takes over many of the tasks, duties and benefits of the franchisor, such as providing support and training, as well as receiving fees and royalties.

Another hybrid-type of multi-unit franchise is an area representative franchise. In this model, the area representative buys a territorial franchise to sell and service unit franchisees in the territory. The area representative does not contract with the unit franchisees (who sign agreements directly with the franchisor), but does receive a portion of the initial fees and ongoing fees paid by the unit franchisee to the franchisor.

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