Types of Franchising
Franchising is becoming increasingly popular in the UK, with 621,000 people employed by over 900 franchise brands as of 2016 - an increase of 70% over the ten years that preceded.
Because franchising is a great way for people to own small businesses and work for themselves and a great way for larger, franchisable companies to facilitate growth, this model is set to become even more prevalent in the future.
There are various different types of franchising and a person’s suitability to each type depends on various factors, such as; how often, if at all, does the franchisee want to work? How much up-front capital do they have? What skills do they possess?
Answering these questions will offer insight into which type of franchising is most appropriate for each investor. This article will explore what franchising is, the different types of franchising and take a look at a franchising business plan.
Franchising Definition
Franchising is a business arrangement between a franchisor and a franchisee whereby the franchisee purchases a license to use some or all of the franchisor's intellectual property, branding, marketing and the rights to sell their products or services.
This business model allows the franchisor to grow their company in a way that contrasts with traditional growth via the acquisition of multiple units over time. Instead, the franchising model allows the rightful owner of the trademark to facilitate the growth of their company while minimising their own liability risk and capital investment.
The franchisor always remains in a position of power due to the legal advantages they have over the franchisee, but nowadays the law requires the franchisor to disclose important information relating to the deal, so if the franchisee knows what they are doing it can be a mutually beneficial arrangement.
Well-known franchise brands include; McDonalds, Subway, Texaco and BP. But there are countless lesser known franchises that don’t require huge investments to acquire, such as those in the domestic services sector.
Different Types of Franchising
1. Social Franchising
This is an interesting concept that contrasts starkly with other forms of franchising for the simple fact that it does not seek to make a profit but rather aims to further a social cause, typically relating to environmentalism or tackling poverty.
Social franchises are not necessarily centralised, though they can be depending on the way they are set up. Social franchising enables the franchisee to be part of a large entity and benefit from its knowledge base and resources, while maintaining their freedom over day-to-day decision-making.
This concept is highly effective for organisations who want to spread a message and tackle a social issue on a large scale, providing a relatively easy way to replicate models in different parts of the world.
2. Business Format Franchise
This type of franchising involves the franchisee taking on the entire business format of the franchisor, such as intellectual property, brand names, branded products and business processes, for an ongoing fee.
Business format franchising is good for franchisees who wish to receive a lot of support from the main company and doesn’t mind them administering stringent guidelines to be adhered to.
Such involvement from the franchisor is usually highly-beneficial to the franchisee as they receive training and assistance from experienced people, which greatly reduces the business’s risk of failure.
3. Job Franchise
Job franchises are a great option for people who want to own their own business and work for themselves but don’t have the time or expertise required to start a business from the ground up. These franchises can be acquired with little investment and upfront costs, normally the cost of equipment, stock and perhaps a vehicle are all that is needed to get started.
Various industries can make use of this kind of franchising model, such as domestic services like loft installations or window fitting, travel and real estate and other kinds of established brands that only require people to provide the services.
4. Internet Franchise
Being the latest evolution of the franchise model, internet franchising offers franchisees the opportunity to work from anywhere with little upfront resources. The kind of work that would be done under this model ranges from running websites and generating leads to digital marketing on behalf of an established brand.
This type of franchising is suited to people with internet-based skills and knowledge, such as digital marketing and search engine researching abilities. It can be done by a single person with virtually no upfront costs.
5. Product Franchise
Product franchises involve a supplier-dealer relationship whereby the franchisee is given the right to distribute the franchisor's products for a fee. Under this arrangement emphasis is placed on the provision of products and not on providing a system for the franchisee to sell the products. This allows the franchisee more freedom over the methods used to offload the products but also invites an increased risk of failure due to the lack of support provided.
This kind of franchising is, therefore, suited to experienced business people who know how to run a franchise successfully and the chances of acquiring one without such knowledge are slim. The sums required to launch and maintain such a franchise can also range into the millions.
6. Conversion Franchise
Offering a spin on the traditional understanding of franchising, conversion franchising seeks to acquire suitable businesses in the same industry that can be converted and reconciled with the main company and brand identity.
This is an effective method for facilitating massive growth for the franchisor and can generate tremendous sums in royalties when executed properly. It is also a way to simultaneously eliminate competition while growing as a company because the businesses that will be converted into the main brand are companies which are similar and cover their own territory.
The franchisor, therefore, acquires the territory for itself while removing the competing brand from the picture entirely. This method can only be used by people who already own a large brand that is suited to this kind of strategy.
