What is a Franchise?

Though there are a few different types of ‘franchise’, business format franchising is probably why you are here. A business format franchise is effectively where an agreement is arranged between two parties, a franchisor (overall business owner) who sells the rights to operate this business using the brand, resources and intellectual property under agreed terms and conditions with an agreed geographic (or through some other form of non-competitive manner) territory to a franchisee.

The franchisee pays an initial franchisee fee for the benefit of being able to operate the brand, sell products or services, receive training and support and other benefits, for a fixed time period.

The franchisee will also pay an ongoing fee, often a percentage of turnover monthly. The franchisor will provide ongoing support, brand development and research. Both parties are working together to achieve mutual success.

The franchise agreement is the legal document that officiates the relationship, and so should cover all aspects and can therefore be very lengthy. Amongst other items, the franchise agreement provides:

• A business/group/person the legal rights to market a product or service utilising the brand name and official trademark of another business (that of the franchisors)
• The franchise rights to market said products or services using the provisioned marketing materials and processes that the franchisor uses,
• The franchisee the obligation to pay a set upfront franchise package fee for the above rights,
• The franchisor the obligation to provide these rights in return and to support the franchisee in the ways that are laid out officially within the franchise agreement.

What is a Franchise? 

As referred at the start of the document, there are different types of franchise:

Product Distribution franchises

Product distribution franchises are those that sell the franchisor’s products onwards for a profit; it works very much as any supplier dealer relationship would in other realms of business.

In product distribution franchising, the licence that is granted to the franchisee covers the trademark and logo of the franchisor company, however importantly it does not provide for complete support for operating their business. Such support could otherwise include marketing, training or administrative support.

This form of franchise is most frequently seen within the soft drinks, gasoline and automobile industries. It’s important to note that whilst these franchises represent the largest percentages when sales figures within retail are considered, the majority of franchises that are available today follow the business format franchise.

Business Format Franchises

Business Format Franchises also use the franchisor’s product or service, but they additionally are provided with a complete method for actually operating the business itself. This includes everything from marketing to practical everyday operations.

The most popular forms of business format franchises are found within the following industries:

• Fast Food
• Business Consultancy
• Retail
• Property
• Business Services
• Domestic and Commercial Cleaning
• Van-Based Businesses
• Children's Education 

Forms of franchise agreements

Franchise agreements are the legal documents that define how a franchisee/franchisor relationship will work; they detail how and what is covered within the franchise package for the price paid and come in the following various formats:

Single-Unit Franchise

This form of agreement is where the franchisor grants the franchisee the legal rights to run their business as one franchisee unit; this is considered as the simplest way of franchising a business and because of this, is the most popular format of franchise.

Area Development Franchise

This form of franchise provides the franchisee with the ability to open more than one business base with the area that is set out within the franchise agreement. The number of additional units and their placement are defined within the agreement however, as is the time period over which this will occur.

Master Franchise

This form of franchise provides the franchisee with the most amount of flexibility and power. It provides them with the same rights as is seen within the Area Development Franchise agreement, but it additionally allows them to sell on franchises, known as sub franchises.

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