Generally there are 3 types of popular franchise system:
- Product distribution franchise;
- Business format franchise; and
- Management franchise.
Product Distribution Franchise
A product distribution franchise model is similar to supplier-dealer relationship, however, the franchisee is required to observe a few guidelines e.g. agreeing to sell only the franchisor’s brand exclusively.
For example, an outlet may agree to sell only certain products in its store at the exclusion of some other products. Typically, the franchisee merely sells the franchisor’s products. However, this type of franchise will also include some form of integration of the business activities. The franchisee is allowed to be much more independent than if he or she was running a business format franchise.
Some well known product distribution franchises are Coca-Cola, the Ford Motor Company, Exxon and Osim.
Product distribution franchises deal mainly with large products such as automobiles and auto repair parts, vending machines, computers and some inventory for convenience stores.
Business Format Franchise
In a business format franchise, the business integration is more complete. The franchisee distributes the franchisor’s products and services under the franchisor’s trade mark, as well as implements the franchisor’s format and procedure of conducting the business.
The arrangement is formalized through a legally binding contract. This comprises the franchisor’s name, goodwill, product and services, procedures, manuals and standards, marketing operating systems and support facilities.
Business format franchising is the most popular type of franchise system and the one generally referred to when talking franchising. Famous examples of Business Format Franchise are McDonalds, KFC, Famous Amos, Starbucks Coffee and Dunkin’ Donuts.
It is a form of service agreement whereby the franchisee provides the management expertise, format and/or procedure for conducting the business. Some examples of Management Franchise are Hilton, American Idol and UPS Store.
Common Considerations of Franchisors
- Developing franchise concept
- Market research
- Familiarity with local laws and regulations
- Providing training and support to franchisees
- Criteria for choosing franchisees
- Control over franchisees
- Supply of products/materials to franchisees
- Intellectual property rights issues, e.g. trade mark registration
Common Considerations of Franchisees
- Profitability of franchise, and length of time required to recoup investment
- Track record of franchisor
- Support rendered to other franchisees
- Experience and profitability of other franchisees
- Existence of competition
- Capital required
- Demands of franchisor, e.g. income projections, deadline to open more franchise outlets