Types Of Franchising
Types of Franchising
Franchise types can be categorised according to several factors which are distinguished by its components, the franchisor's strategy, and the levels of involvement by the franchisor & control over franchisees, franchisee options for expansion in the granted territory and also the type of franchise business. These factors can overlap in many instances, which make it difficult to rely on a single definition for a type of franchise when related to real life examples.
Here the Franchisee ('Area Developer') enters into an agreement (usually called an area development agreement) whereby the rights are purchased to develop, within a specific time limit, a minimum number of outlets or units within a specified territory. The Area Developer typically enters into a separate Franchise Agreement with the Franchisor for each operation/unit opened and is required to own and control each of the operations/units.
This occurs when the Franchisee already carries on the same line of business as the Franchisor, but wishes to improve or expand by adding the benefits of the Franchisor's marketing, advertising and promotions. There may be the possibility of converting small independent traders who welcome the idea of joining the strengths of a national and/or international branded Franchise network with all the associated benefits. These independent operators acquire the same name and logo, the benefits of mass buying, national customers, national advertising, and generally more power to compete in their marketplace.
When a franchisor with its head office in a given country grants franchise rights and on-going training and support directly to single unit franchisees ("indigenous franchisees") operating in their country of origin, it is said to be engaging in direct franchising. A foreign franchisor can support a single unit franchisee directly from its home country, or by establishing a local presence in the host country, two forms of direct franchising that are defined as direct unit franchising and direct investment franchising, respectively.
The Franchisor opens and operates an outlet as a company owned operation until it is eventually sold as a going concern to a Franchisee, this policy is followed by McDonald's. The Franchisor acquires a specific location and develops the outlet prior to finding and training a qualified Franchisee. If, as a going concern, the outlet has proven to be very successful, there would be an increased franchise fee (The Franchisor as the original owner having accepted the risk), in addition to the normal initial franchise fee and reimbursement of asset costs.
The Franchisee puts up substantial capital to invest in a high cost Franchise system, and although retaining overall strategic management, hires others to manage the Franchise outlet tactically on their behalf.
Involving a lower level of financial investment, where typically a self-employed one-man operation, 'one-man-and-his-van' or vehicle-based service / installation / repair business in areas like cleaning, automotive services or home delivery.
A franchisor enters into a joint venture agreement with an indigenous business entity or entrepreneur for the purpose of establishing and developing the franchisor's business system. The respective parties' contribution may differ widely from one case to another. Contributions would include such resources as intellectual property (including trademarks, processes, methodologies and "know-how"), property, plant and facilities, working capital, and human resources.
This involves a substantial investment in property and staff where the Franchisee controls possibly several territories or a region and manages a team of operatives.
Here the rights for a specific country, region or continent are awarded, empowering the Master Franchisee to provide the full range of products and services of the Franchisor through sub-Franchising, in just the same way that the Franchisor runs its own business. Master franchising is said to exist when a foreign franchisor grants rights to an indigenous business entity or entrepreneur (the "master franchisee"), who, in turn, grants franchise rights directly to indigenous franchisees and provides on-going training and support to those indigenous franchisees. In effect, the franchisor has "sub-contracted" its rights and responsibilities to a person or group.
This is where franchisees mainly operate a high yield business system, such as high street fashion or beauty chains.
It is a lower to medium size investment, where the franchisee "effectively on the road" selling and/or distributing products or services in his territory and where he could hire other driver-delivery personnel to cover an area as the customer base grows.
The purchase of a Single-Unit Franchise by an individual is the most traditional and historically the most common form of franchising. Buyers are required to invest their own capital, apply their own management skills (generally hands-on) and accept the risks associated with being "in business for yourself, but not by yourself".
The Franchisor works with the prospective Franchisee to set up an outlet and at the time of its opening, handover to the qualified and trained Franchisee. In exchange, the Franchisor will receive from the Franchisee an initial Franchise fee and reimbursement of the related development and inventory costs. A mark up would be added to these costs as a fee to the Franchisor for managing the development of the project.
The Franchisee runs his own 'white-collar' business, generally involved in areas such as financial services, personnel, consultancy or project management. Expensive premises are not essential because work tends to be taken to clients' premises. It also relates to managing a "job" type territory.
A franchisor establishes a wholly owned corporate subsidiary in the host country with the purpose of granting franchise rights directly to indigenous franchisees and providing on-going training and support to those franchisees.6. Job Franchise
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