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Types of Franchises

Franchising is a great way to become an owner of a small business. There are three different types of franchises which you can choose from, they vary in terms of your position, your input into the business and the amount of involvement of the franchisor. The three types of franchises are; the business format franchise, product distribution franchise and management franchise. Each franchise operates differently and in this guide you will find the differences between the three.

types of franchising

The three types of franchises are; the business format franchise, product distribution franchise and management franchise. Each franchise operates differently and in this guide, you will find the differences between the three.

What is a Business Format Franchise?

This type of franchise is perhaps what most people refer to as a typical franchise. This type of franchise is when the franchisor gives the rights to trademarks, trade names, business process and the system in order for the franchisee to sell the product, for a fee. Further details of this type of franchise is listed below:

  • The franchisor is heavily involved in terms of how the service is provided and the business is run. This kind of franchise relationship comes with guidelines and expectations from the franchisor which the franchisee has to adhere to.
  • There is a binding contract/agreement between the two parties to bind the two for a certain period of time.
  • The great thing for franchisees is that ongoing support, advice and training is given by experienced franchisors. Advice and good training can make a huge difference in the success of a business, therefore this is a great benefit.

The business format franchise is the most popular type of franchise system that is chosen by franchisees. Some of the biggest brands that adhere to this type of franchising are McDonald’s, Dunkin’ Donuts, Starbucks and KFC.

You can tell how closely the franchisor and franchisee work with each other from these big brands by the similarity of the product and service in each branch you visit. For example, if you order a Big Mac from London, you can get the exact same burger in Manchester. Some of the most popular industries for business format franchises are fast food, fitness and restaurants.

What is a Product Distribution Franchise?

This franchise concept is similar to a supplier-distributor relationship. The franchisor is responsible for providing the product and the distributor is then able to sell the product on. Further details on this type of franchise is listed below:

  • The main thing that is given by the franchisor is the product whereas with the business format it includes training, support etc.
  • The franchisee can be much more independent in terms of not having the restriction and guidelines that a business format franchisee has.
  • Product distribution franchisee still have to follow certain guidelines such as selling the products on an exclusive or a semi-exclusive basis.
  • The franchisee has to pay fees for using the trademark name and trademarks and the products that they are wanting to sell.

The product distribution franchise method is used often for larger products, such as vending machines and cars. Some of the big brands which use this concept are Coca-Cola and the Ford Company.

Interestingly, although the business format franchise is the most popular, the product distribution franchise actually represents the highest percentage of total retail sales.

What is a Management Franchise?

This franchise focuses on the franchisee managing the franchise. The manager does not really need to part take in the day to day running of the business. Further details of this type of franchise is listed below:

  • This type of franchise would be ideal for somebody with previous managing experience as it allows individuals with transferable skills to really take ownership of a business and lead it to success.
  • Business-related skills such as having an entrepreneurial flair, preferably from experience, will only help you in the journey to success.
  • For this type of franchise, you will also be required to pay fees for the ability to use the trademarks of a franchise, and your focus is on business development, overseeing the business and managing the team.

Management franchising is great for resale franchises, which are franchises that are bought from an existing franchisee, as all the operational day to day tasks and activities are in place including the existing staff. It may seem like you don’t need to make changes and it’s easy to run an existing franchise, however, there are certain things you need to consider. If your chosen franchise has not been performing well, then you may have to implement serious changes to the staff or the day to day operations.

How to Choose the Right Type of Franchise for You?

Choosing the right type of franchise for you will depend on certain factors as the three types of franchises described have their own benefits, and differ mainly due to the functionality of the business. The industry in which your business is in, will dictate what type franchising method you go for.

For example, running a big food retailer business like McDonald’s or Starbucks may mean a business format franchise is what is right for you, as you will receive support, training and guidance from the franchisor on how to follow their business model and become successful for the long-term.

Another thing to consider is that, your personal ambition and willingness to be flexible will also affect this decision. A business format franchise may be seen as a little more restrictive in comparison to management franchise, where you may have more flexibility with the ways in which you want to manage your business. This decision will usually factor on things such as the domestic markets wants and needs, the popularity of the businesses products/services within your region and much more.

You can read more on franchising here and a beginners guide to franchising.

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