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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 types you may come across.

1. Product / Trademark Franchise

This can be described as a supplier/customer relationship between a supplier and a dealer in which the dealer acquires some of the corporate identity of the supplier. It has the distinction to be the longest-established form of modern-day franchising and revolves around a product and its distribution. The franchisor grants the franchisee the right to an exclusive territory, trains him/her in effective promotional and service techniques and usually demands brand exclusivity in return. The franchisee will not receive a detailed business package or significant ongoing operational support.

A typical example of a product franchise would be:

Singer’s network of franchised sewing machine dealers, which has been in operation since the 1860’s. Following the invention of the automobile, petrol companies and motor manufacturers followed suit. More recently, the latter two industries are migrating towards fully-fledged business format franchising.

The reason for this is that it affords them much tighter control over their dealers’ activities, while offering dealers the opportunity to build a branded asset that can be resold with relative ease. Other well-known examples can be found in the soft drink bottling industry and the automotive sector.

2. Business Format Franchise

In its modern usage, “franchise” stands for “business format franchise”.

The hallmark of a bona fide franchise is its capacity to create a win/win situation for its participants. Franchising is the only business format that ties the long-term business success of the seller, known as the franchisor, irreversibly to the long-term business success of the buyer (franchisee) and vice-versa. This may sound far-fetched but goes well beyond idle talk. In a properly constructed franchise, the franchisor’s ongoing income is inextricably linked to his franchisees’ combined turnovers. This creates a powerful incentive for unstinting franchisee support.

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. Conversion Franchise

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.

5. Regional Master Franchise

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.

Under a regional master franchise arrangement, the franchisee has the obligation to establish at least one unit within a territory and then exploit the potential of the territory further by sub-franchising to others. These sub-franchisees are under the operational control of the area franchisee who in turn is controlled by the franchisor.

It is customary for the master franchisee to provide operational support and collect fees within the territory. Such an arrangement has the potential to blur established lines of control, with the franchisor and the master franchisee vying for dominance. There is also the reality that it will dilute the amount of money available for franchisee support because income from fees paid by franchisees has to be shared between two parties.

6. Master Franchise

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.

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 types you may come across.