As franchising has grown, its personality has evolved but its essential structure and purpose have stayed intact.
Primarily, franchising fills the gap between two business parties, allowing them to maintain a relationship where each has a valid interest in the other’s business. The extent of the rights and interests of both parties is determined in a written contract that defines the type of franchise.
However, to clearly understand what a franchise is, you first have to learn about the different types of franchises:
Product And Trade-Name Franchises
Product and trade name franchises are primarily used to set up distribution networks for the franchisor through dealer companies.
By franchising out the distribution of its products, the franchisor is able to control the way the dealer company operates by restricting the sale of competitive products or the type of marketing that it can do.
In turn, the dealer, or franchisee, receives the recognition that accompanies a well-known firm. They may also receive financial, marketing and managerial support from the franchisor.
Business Format Franchises
This has become the most popular type of franchise, and the one with which most people are familiar.
Under this arrangement, the franchisee is granted the name, the use of the products, the marketing techniques, the systems, internal controls and operations procedures.
All the franchisee is doing is simply managing an established business – a total business concept – which, in some cases, is a turnkey package.
The individual franchise is probably the most common type of business-format franchise. Under the individual franchise, the franchisee is granted the right to operate a single unit in a single area using the total concept of the franchisor.
Affiliate or Conversion Franchises
Affiliate or conversion franchises are primarily used by a group of independent businesspeople within a very fragmented industry in order to combine their resources to produce more visibility.
This is done by having each business affiliate with all the others under one name to create a franchise network.
Under this system, all the companies are able to pool together their purchasing power, advertising clout, and marketing abilities to capture a greater share of the market.
The affiliate companies are not legally bound to use the banner name of the franchise, which doesn’t have to be a trademark or brand name. Many affiliates will, in fact, use the franchise name as well as their own, as is the case with Century 21 Real Estate.
The variety and scope of franchising today is such that anyone planning on opening a business dominated by franchising, or characterised by aggressive franchisor advertising, should at least consider joining them, rather than beating them.
It is much easier to buy a franchise outlet than start an entirely new business franchise.
Unless you bring to the table a good deal of knowledge, expertise and marketing judgment, you may get yourself into trouble by trying to compete with the veterans of the industry.
