What are the different Franchise types?

As a prospective franchisee, before you start looking at specific opportunities and investigate their advantages and disadvantages, you should familiarise yourself with the various franchise models you may come across. These can be broken down by the above.

Understanding these concepts fully will help you make the decision that will serve your personal aims and aspirations best.

Industry sectors

The days when franchising was the domain of fast food operators are gone for good. Although food franchises continue to play a major role, many other industry sectors have recognised the advantages of franchising their businesses. To give specific figures is difficult, simply because industry sectors tend to overlap. For example, depending on the methodology used, restaurants could be classified as one segment, or broken down into fast food and sit-down establishments, coffee shops, snack bars and so on. One could even take one step further and break sit-down establishments down into steak houses, pub concepts and ethnic restaurants. The permutations are virtually endless, suggesting that you have a wide range of opportunities to choose from.

Important note: Reports received from the US suggest that up to 80 different industry sectors are currently expanding through franchising, with new sectors coming on board all the time. In South Africa, franchisors are currently classified under 14 main headings ranging from automotive products and services to retailing and direct marketing concepts. For the latest information on this topic, turn to the whichfranchise opportunities section.

1. The development model

This is the franchise model the franchisor selects for the expansion of the network. During the early years when franchising became established, every franchise was granted as a unit franchise. Even today, this model remains the most popular by far. However, other models have been developed and you should be aware of them. You should also know that some franchisors take a mixed approach to expansion. They establish company-owned units in close proximity to head office, enter into joint ventures where units are a certain distance away and set up franchises in more remote locations. This is how this works:

2. Company-owned unit

Before there can be a franchise, the aspiring franchisor must test the concept in the market. This is the only way to test market acceptance and iron out all possible glitches, be they in the realm of product development, branding, processing, distribution or installation.

Most franchisors retain at least one unit indefinitely, for several reasons:

It serves as a model unit and training ground for new franchisees.
Product modifications and improvements to systems can be tested before being released into the network.
Profits generated in a company-owned store are the franchisor’s to keep. Returns from franchised units are limited to a small percentage of sales. This prompts some franchisors to operate several units for their own account, especially if these can be clustered around head office to simplify control.

3. Joint venture

A franchisor may enter into joint venture agreements with prospective franchisees. The business is set up at arm’s length, with the franchisor retaining a stake. This model can be attractive for several reasons:

  • An individual who displays potential to operate the business successfully but cannot raise sufficient funds to acquire a franchise outright can do so over time.
    • A company or CC is set up and awarded the franchise.
    • The individual obtains a small stake in the business at the outset, with the balance held by the franchisor, or a third party investor.
    • The individual manages the business and receives a modest salary.
    • The same individual is entitled to acquire additional shares in the business over time. This is often funded from retained profits.
  • The franchisor can expand into a new area with the help of an individual who is determined to make the best of the opportunity.
  • This model is ideally suited to BEE initiatives, for example by offering deserving employees an opportunity to acquire a stake in a business immediately and own it outright over time.

4. Unit Franchise

As previously stated, this is the classic franchise format. The franchisee makes an investment into one unit and this is the full extent of the initial agreement. At a later stage, a unit franchisee may be offered an opportunity to invest into additional units, thereby becoming a multi-unit franchisee. This is, however, at the franchisor’s discretion, usually subject to performance criteria.

5. Conversion Franchise

A conversion franchise is a unit franchise. The only difference is that instead of recruiting a franchisee and setting him or her up in a newly established business, the franchisor recruits an established operator into the network. Following a complete makeover, the business operates as a franchise, trading under the network’s brand and using its systems and procedures.

Such an arrangement offers potential benefits to both parties:

  • If the business is highly site-dependent, as is the case in most retail operations, the franchisor gains access to a prime site with an established customer base.
  • The franchisee gains access to the network’s superior marketing and bulk purchasing power.

6. Fractional Franchise

This, too, is a standard unit franchise except that the franchisee occupies premises within an established business. This method of expansion is best suited to concepts that stand to benefit from available synergies.

To illustrate, let us assume that a car wash facility and a convenience store occupy part of the forecourt of a petrol station. Ideally, the three businesses will retain their distinctive corporate identities and will operate as independent business units. However, they share the same customer base with the garage and stand to benefit from customers crossing from one to the other for add-ons. Moreover, these businesses’ management, marketing activities and administration can be partially or fully shared.

7. Area Developer

The area developer acquires the right to develop the brand within a defined geographical area. Most often, this takes the form of the developer setting up a predetermined number of branches in the area and operating them for its own account.

8. Regional Master Franchisee

A regional master franchisee acquires the rights over a defined area from the franchisor and rolls out the franchise through a mix of company-owned stores and sub-franchisees. As far as sub-franchisees are concerned, the master franchisee assumes many of the rights and obligations of the franchisor.

9. Master Franchisee

In most instances, a master franchisee contracts with a foreign franchisor to act as the local franchisor in the target country, or a defined area within the target country. The master franchisee usually assumes all rights and obligations of a franchisor. This means that the master franchisee is responsible for testing of the local market, franchisee recruitment and training, initial and ongoing franchisee support and quality control.

Types of franchises

The franchise type identifies the nature of the work that the running of the franchise entails. There are five categories:

1. Retail franchise

In a retail franchise, the franchisee will generally occupy retail premises and sell products or services. The business depends totally on the location of the premises, with sales coming from walk-in consumers. In this situation, the franchisee will:

  • Sell a product or service to end-users.
  • Operate from locations with high foot traffic like shopping malls.
  • Depend on walk-in customers for sales.
  • Manage the business during retail hours, often stretching into long days and weekends.
  • Be dealing with the public; this requires the franchisee to be a people person.
  • In most instances, staff will have to be employed, requiring the franchisee to be a good manager of people.
  • In some cases, prior experience in the type of business is essential.

2. Management Franchise

In a management franchise, the franchisee is expected to market and manage the business while trained staff carries out the actual business activity.

A good example of such a business is a plumbing repair franchise. Orders are obtained via the telephone and trained repair teams carry out the work at customers’ premises. Many business-to-business activities are handled in a similar manner, except for the fact that a travelling sales force will be employed.

In this situation, the franchisee will:

  • Need premises located in an office block or an area zoned “light industrial”.
  • Be selling a product or perform a service, on occasion a combination of the two.
  • Market and manage the business during regular office hours (except in instances when the service involves emergency response).
  • Employ and manage skilled staff.
  • Need to do quotations and administer workflow. Depending on the complexity of the work to be carried out, in some instances, the training provided by the franchisor will suffice, in others, prior experience in the particular field will be required.
  • Deal mainly with businesses, to a lesser degree with the public. The franchisee needs to be able to handle this effectively.

3. Single Operator Franchise – Manual

In this franchise format, the franchisee carries out the work him/herself. This usually involves the carrying out of a trade, or the selling and supply of products or services. It may be a mobile set-up and could be home-based or operated from small office premises.

In this situation, the franchisee will:

  • Need to acquire the expertise required to sell and install a product or perform a service.
  • Work on his/her own, at least initially. As the business grows, it may become necessary to employ staff and the franchise could develop into a management franchise.
  • Market the franchise locally to generate a steady flow of business.
  • Deal with the public as well as with businesses.
  • Conduct much of the business via the telephone.
  • Be mobile, perhaps van-based and undertake administrative chores from home. On occasion, small industrial premises may be necessary.
  • On occasion, such franchisees may be required to wear a uniform that reflects the network’s corporate identity.
  • Have flexible business hours.

Important note: Although this business format exists in South Africa, it generally lends itself better to a distributorship. The reason for this is that a fully-fledged business format franchise may be too expensive to operate. There is a notable exception, though: small fast food franchises, for example hot dog stands, often depend on their success on the franchise format for brand recognition and quality assurance. A good example is the Hot Dog Cafe, which is a successful franchise chain.

4. Single Operator Franchise – Executive

In this franchise format, the franchisee carries out the work him/herself. This usually involves the carrying out of a professional service or the selling and supply of products that require professional input and/or user-support and troubleshooting. The business could be home-based or operated from small office premises. The type of work is executive, examples are bookkeeping services, tax advice, business consulting, training or the supply of comprehensive office solutions for small businesses.

In this situation, the franchisee will:

  • Need to learn to perform the service, for example to write up the client’s books, usually at the client’s premises.
  • Work on his/her own, at least initially. As the business grows, it may become necessary to employ staff and the franchise could develop into a management franchise.
  • Market the franchise locally to generate a steady flow of business.
  • Deal mainly with businesses, but sometimes with the public as well.
  • Conduct much of the business via the telephone and through electronic communication facilities.
  • Work from home or have small office premises but essentially be mobile.
  • Work regular office hours, at least most of the time. Important note: At this level, franchises have the potential to become extremely successful.There are two good reasons for this:
    • On the input level, networks find it easier to develop proprietary materials, for example computer software, and set up intranets, essential in today’s business climate but generally out of the reach of individual operators.
    • On the output level, the target customer base, usually SMEs, is attracted by a network’s branding activities, which imply a strong component of quality assurance and fidelity. They are also reluctant to deal with large professional firms, considering them too expensive for their needs. Rather, they prefer to deal with franchisees, small businesses themselves.

5. Investment Franchise

This term means that a wealthy investor, often a corporate entity, makes a substantial investment in a franchise without having any intention of working in the business. Management of the franchise will be delegated to an executive team that is responsible for day-to-day operations. This format is used, for example, in the hotel business. It is not very popular with franchisors of smaller concepts. The reason for this is that the physical presence of the owner “behind the counter” is what customers want. Experience has also shown that the owner’s presence makes the business successful.

Summary

The above gives an inkling of how versatile franchising really is. You will read more about the all-important step of assessing, firstly, whether franchising is the optimal route for you, and secondly, how to choose the franchise that meets your needs, under the heading Evaluating a franchise offer.