Franchise Basics: Elements of a Franchise
When exploring the purchase of a franchise, you’ll want to know the franchise basics. Understanding the elements of a franchise helps you distinguish one from another. Here’s a primer.
Franchise Types: Business Format vs. Product Distribution
Let’s start our look at franchise basics at the very beginning. There are two types of franchises. Each has a different franchisor/franchisee relationship.
Type 1: Business Format Franchising
Most franchisors of this type provide almost everything a franchisee needs to start the business. This includes products, trade names, and operating procedures. The franchisor also assists with site selection, build-out, furnishings, training, inventory, and marketing. This is sometimes called a “turnkey” business.
Most of the franchise brand names you’re familiar with are business format franchises. This includes companies selling retail products and those providing services. It’s the most common type of franchise in the U.S.
Type 2: Product Distribution Franchising
Product or trade name franchising resembles a distribution arrangement. Here, the franchisee buys the right to distribute the franchisor’s products. The franchisee may carry other brands in addition to the franchisor’s.
Franchisee Types: How Many Units?
A franchisee may purchase one or more units. Usually, the franchisee’s financial resources determine the number purchased.
Single-Unit Franchisee – Franchisee owns one unit/location.
Multi-Unit Franchisee – Franchisee owns more than one unit.
Area Developer Franchisee – Franchisee owns a large territory. The goal is to subdivide and develop individual franchise locations. The franchisor may specify a time frame.
Master Region or Master Franchisee – Franchisee owns the right to a large area. Again, the goal is to develop a number of units within a defined time frame. But unlike an Area Developer, a Master Franchisee also has the right, and sometimes the obligation, to sell franchises within the territory to others.
Territories: How They’re Drawn
Franchisors map out territories using statistics such as population density, median income, and industry-specific criteria. They may draw territory lines according to zip codes, area codes, cities, states, or regions. The goal is for each territory to contain an optimal number of potential customers.
The number and variety of franchise opportunities can be overwhelming. But with a general understanding of these franchise basics, you’re armed with knowledge to help you get started.