Types of Franchising

There are four generally agreed-upon forms of franchising: business format, product (also called "single operator"), manufacturing and master. Because business format franchising is so common, this is what most people think about when they discuss franchising. Even so, it is important to know the full extent of franchising opportunities when you consider entering into a franchising agreement.

Of the 770,000 franchise businesses in America, 80% of them use the business format. In a business format franchise, an individual can buy and operate a business with an established brand name like McDonald's.

Under this model, the new business owner will be supported throughout the initial business stages and as long as he operates the franchise. He will also benefit from the company's business plan, operations documentation, branding and marketing. In exchange for this support and the use of the business name and its trademarks, the franchisee must pay an initial franchising fee as well as recurring royalty payments to the franchiser. The franchisee may also have to buy some or all of the materials directly from the franchiser, including stock and uniforms.

While the business format is the most common type of franchising, product franchising is actually the oldest form. Product franchises allow for dealers to distribute goods for a manufacturer. The dealer pays a fee for the ability to sell and market these trademarked goods, which are also purchased directly from the manufacturer. In some cases, the franchisee doesn't have to pay a fee but must instead sell a minimum amount of products.

The simplest example of this is a car dealership that specializes in one brand of vehicles, but Mary Kay and Tupperware salespeople also operate under this model. The popularity of the latter is why this model is also often called "single operator" franchising. The manufacturer in these arrangements will often provide additional materials such as training guides, uniforms or equipment it feels is necessary to represent its brand.

Under a manufacturer franchise model, the franchisee obtains exclusive rights to produce and distribute a product in a certain area. Manufacturer franchises are most commonly used in the food and beverage industry, although this model can be used for any product that needs to be manufactured.

A good example is Girl Scout cookies. Depending on where you are located, they may call the chocolate, caramel and coconut cookies either Samoas or Caramel DeLites. This is because the Girl Scouts have franchised the production to two different manufacturers. Each company calls its cookies a different name and even makes its cookies in slightly different manners.

While most franchise agreements are between the individual franchisee and the company represented, there is actually one final type of franchise opportunity that exists. This is known as a master franchise and involves a franchisee known as the master franchisee recruiting her own franchisees in a specific territory.

In this case, the franchisor offers its trademarks and products for the individual franchisees to use, while the master franchisee recruits, trains and provides support to the lower franchisees. In exchange for her efforts, the master franchisee will take around 50% of the initial franchise fee and royalties paid by the lower franchisees.

This arrangement is often used in international franchises because it allows a foreign company to work with a local businessperson who is familiar with the area's laws, language and customs. It can also be useful in domestic franchises where local knowledge of an area is invaluable to a franchisor — for example, in the real estate industry.