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Types of Franchise Businesses

A franchise business, at its simplest, involves an owner of a product or service who licenses some aspects of the business to another party for their use. The owner is referred to as the franchisor and the party granted the license is called the franchisee. If this all sounds a bit vague, it's because there are several different types of franchise businesses. The following article explains some of the most common types.

What Is Licensed by the Franchisee?

One way different types of franchises can be distinguished from one another relates to what aspects of the franchisor's business interact with the franchisee's. Franchisors can license their business model, the rights to distribution and production. If you are considering buying a franchise, it is wise to familiarize yourself with the different kinds of franchising agreements. The following types of franchise businesses are among the most common:

  • Business Format Franchise - The franchisee receives a business model developed by the franchisor as well as employee training, site selection, equipment, and other assistance establishing and operating the franchise. Business format franchises include most chain stores and restaurants.
  • Business Opportunity Venture - The franchisee distributes products or services on behalf of the franchisor to customers developed by franchisor in return for a percentage of sales on commission. Business opportunity ventures include vending machine companies and Avon or Mary Kay Cosmetics salespeople.
  • Manufacturer Franchise - The franchisor grants the franchisee the right to manufacture the franchisor's product under license and then sell the product using the franchisor's trademark and company name. Soft drink and gasoline companies are often manufacturer franchises.
  • Product or Trade Name Franchise - The franchisee purchases the franchisor's products, which the franchisee distributes and sells. The franchisor maintains a significant amount of control over the distribution and sale of the products. The franchisee may be required to buy minimum inventory amounts. Brand name stores are often product franchises.

Franchises and Sub-Franchises

Very large franchises may include different roles within the franchisor/franchisee relationship. This typically occurs when a franchise is seeking to open or develop markets. A new kind of franchise arises when a franchisee has the franchisor's authorization to distribute, administrate, or sell sub-franchise rights. Examples include:

  • Master Franchise - This occurs when a franchisee is granted a license to act as the franchisor. In return for a substantial fee to the original franchisor, the franchisee is granted the right to license franchises, provide franchising services, and collect royalties from their sub-franchisees.
  • Area Developer Franchise - This occurs when a franchisor has granted a franchisee the right to grant franchises to sub-franchisors. Area developer franchisees are often authorized to divide the geographic area into districts, conduct studies to determine how this can best be done, and to market and sell sub-franchises to franchisees who then establish and operate the individual businesses. Unlike a master franchise, an area developer franchise is typically more limited in scope and terminates upon successful completion of the development process.

Get Experienced Advice About Franchise Business Options

The foregoing overview of the types of franchise businesses only scratches the surface of the wide array of business arrangements that are possible. Too many options can be as difficult to handle as too few, however, and you may need experienced advice sorting out the kinds of business opportunities that are best for your situation. Consider consulting with an experienced franchising attorney to seek assistance making a wise choice.

Next Steps
Contact a qualified business attorney to help you
navigate the process of starting a business.
(e.g., Chicago, IL or 60611)

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