To navigate comfortably in the ocean of franchising it is handy to understand the models of franchising, franchise chain development models and business fields most commonly employing franchising business model.
In the following paragraphs, we shall discuss several franchise models that are most common worldwide:
- In a Distribution franchise network the franchisee simply sells the franchisor’s goods and has the right to use the franchisor’s trademarks. Sometimes the franchisor sets certain requirements (e.g. decoration or location of shopping areas), or provides certain recommendations, (e.g. conduct or dress norms of staff), but does not provide the whole business management system. Most common businesses operating under goods distribution franchise arrangements are brand clothing, cosmetics, accessories stores and car dealerships. This franchising model is similar to commercial relations between a supplier and a distributor. In the contemporary franchising world, the Distribution franchises are becoming increasingly similar to business model franchises when the franchisor also transfers to the franchisees the business algorithms, management systems, and IT and accounting instruments.
- Business format franchise is the most common of all franchise models and can be applied to almost any business sphere. Under the Business format franchise the franchisee not only sells products and/or provides services and is entitled to use the franchisor’s trademarks. The most important point is that the franchisee receives detailed descriptions of business management methods. The methods explain how to manage the whole business and each of its constituent parts. In other words, by acquiring a Business format franchise, the franchisee receives all of the franchisor’s intellectual property and his business concept, which he can use to develop his own business under a franchise contract.
- In a Manufacturing franchise network the franchisee receives from the franchisor all technological production “know-how” but usually does not receive the right to distribute the manufactured product directly, (although occasionally such a right is granted to him alongside the right to use the trademark and the system of goods distribution). This model is most common in the beverages and food industry.
Franchise development methods
A potential franchisee who has begun to take interest in franchisor’s offers, will definitely receive proposals that differ from each other in their development specificity and franchisee’s obligations. Moreover, a franchisor who is creating a franchise network will have to decide the type of franchise and the ways in which to expand it. The primary franchise development methods are direct franchising and master franchising.
The main distinctive feature of direct franchising is that signing of a franchise contract and direct communication takes place between the final franchisee and the franchisor. There are three categories of direct franchising: single-unit, multiunit and area development franchising.
- In the case of single-unit franchising, when selling the franchise, the franchisor grants to the franchisee the right to open a single-unit (business unit) and operate it. Usually such franchises are those offered at the beginning of their development; buyers are usually individual entrepreneurs who plan to work at the unit and manage its operation in person. When buying a single-unit franchise, the entrepreneur receives territorial protection, in other words, the franchisor ensures that another unit bearing the same trademark will not be opened within an established distance. This means that potential franchisees are restricted in terms of choosing the location of the new unit: they may be offered a list of available locations to choose from, or obligated to sub-rent premises from the franchisor.
- In the case of multi-unit franchising, by buying the franchise the franchisee also acquires the right and the duty to open a pre-defined number of units (business units) over a certain period of time. Usually multi-unit franchisees are either those who have experience in running a single-unit and are looking to expand their business, or investing entrepreneurs who do not intend to work at the units in person. This development method is also characterized by territorial protection, thus, a multi-unit franchisee can be obligated to co-ordinate the location of each new unit with the franchisor in order not to create competition to other franchisees of the same network.
- Area development franchising is fundamentally very similar to multi-unit franchising in the sense that a single franchisee is granted the right and also the duty to open and directly manage a pre-defined number of units. The first difference between them is that in the case of area development franchising in a specified territory, (e.g. a city or a country), the franchisee has the right to independently decide about the location of his units. The second difference is that under the franchise agreement, the franchisee has an obligation to open the minimum number of units, but he can open more units within the granted area if he believes it is economically beneficial.
The examples of direct franchising clearly demonstrate the growth potential of each of the development methods described. In the case of single-unit franchising, the development of the franchise network is the slowest, whereas multi-unit and area development franchising create preconditions for more rapid expansion. The fastest development of a franchise network however can be achieved through master franchising, sometimes referred to as sub-franchising.
- Master franchising is the most complex but also the most attractive development method of a franchise network from the franchisor’s perspective. Its distinguishing feature is that rather than selling franchises directly to franchisees, the franchisor transfers them via intermediaries also referred to as master franchisees. This method is similar to area development franchising in the sense that each master franchisee has the right and the duty to sell franchises to end franchisees in a certain pre-defined territory (e.g. a country or a region). Master franchisees usually acquire the right and the duty to sell no less than a certain number of franchises over a certain period of time, and they are free to sell both single-unit and multi-unit or territory development franchises.
Master franchisees usually do not open or develop activities of individual units. Their main function lies in the development and management of the network of end franchisees in a certain territory. Master franchisees invest in the recruitment of new franchisees and their supervision, and earn return on their investments from the difference between the fees paid by franchisees and transferred to the franchisor. This franchise network development method is useful when preference is given to the rapid expansion of a franchise network in new markets. Master franchisees are usually very familiar with the peculiarities of the local market and they are able to create franchise adaptation solutions and have access to the segment of potential franchisees.
Conversion is yet another special method of franchise development. The distinctive feature of Conversion franchise is that franchisees are entrepreneurs working in the same business field as the franchisor. By acquiring a conversion franchise and becoming franchisees, independent entrepreneurs carry on with their business but receive from the franchisor the right to use the trademark of the network, accumulated “know-how” and optimized business processes. Thus they gain access to cheaper supply and/or a wider customer segment. This development method is most common in the business of real estate brokers, hairdressers, business consultants and petrol stations.
Franchising practitioners claim that any kind of business may be franchised. However, it is natural that the attractiveness of different business fields for franchising is not the same. Franchising is most widely applied in businesses that are easy to systematically organize, and can be learned quickly. If the majority of business processes can be standardized and are easy to replicate, then there is a chance that franchising may become a suitable development method for such a business. In the case of more complex business models, i.e., many unique projects are performed, the technological process is very complex and requires specific knowledge, franchising is less attractive.
One also needs to pay attention to the fact that the franchisor must constantly provide the value to franchisees. This might be difficult in some of the business fields. The more opportunities to constantly generate value (not only in the beginning of the franchising relationship) there are, the more suitable the business is for franchising. For example, it may be difficult for a construction business company acting in a relatively small market to ensure the constant provision of the value to franchisees and prevent competition between franchisees, if every one of them may perform work in any part of the country without high additional costs. In such a case, the franchisor must thoroughly develop the internal franchise network cooperation rules and constantly invest into the provision of additional value to franchisees so that they would be interested in staying in the network, to act in good faith and to pay the franchise fees.
Due to these reasons, historically, franchising became a general method of business development in certain business areas, while in other areas franchising is still quite exotic. Here are some of the business fields that are most suitable for franchising:
- Education and training;
- Financial services;
- Information technologies;
- Management consulting;
- Public relations, advertising;
- Real estate agencies;
- Recreation and entertainment;
- Repair shops;
- Sports, health and beauty;
- Transportation, etc.
The provided list of business fields is not definite. As it was already stated, businesses in almost every business field may be franchised, and the results of franchisor’s business depends more on a particular business model, its success and other internal and external factors than on the field of business.