Over time, as franchise business has evolved, different types of franchises have become available on the market. Today, starting or buying a franchise is completely normal; this business format has become more popular than starting a business from scratch.
When we talk about which types of different franchises we have, we will start with the simplest form, in which the franchisor has the right(trademark) to a name or brand and sells that right to the franchisee. This is known as a Product/Brand Franchise.
In contrast to this first type of franchise, we have so-called the Business Format Franchise. This type gives a broader and longer-term relationship between the two parties than the Product/Brand franchise.
The Business Format franchise often includes a wide range of services, including site selection, training, product procurement, marketing plan, and sometimes financing. The franchisee sells products or services supplied by the franchisor or sells products and services that meet the franchisor’s quality standards.
Except for these two types, there are also many franchise divisions whose names are given according to the relationship between the provider and the recipient- what the recipient gets from the provider.
If you know what is franchise, then you are aware that the franchise agreement is a must-have in all these types of franchises, and with it, we know both parties rights and obligations in this business relationship. This agreement will be different for every franchise; it depends on the franchisor.
To make it easier for you to understand all types of franchises, we will divide them into three categories, and then we will divide them into subcategories. In this way, we will explain all the divisions to you in the easiest vocabulary so that you find a type of franchise that is the right choice for you.
3 Types of Franchises and Their Subcategories
Most often, the types of franchises are classified according to three criteria: according to the type of activity, the type of know-how that is transmitted to the recipients, and according to the way in which the franchise system is “organized.”
1. By business activity :
- Distribution franchise (trade)
- Service franchise
- Production franchise
- Mixed franchise
2. By the type of know-how that is transferred to the franchisees:
- Product distribution franchise
- Business format franchise
- Manufacturing franchises
3. By the organization of the system:
- Direct franchise
- Multiple franchises
- Regional representation
What Is a Distribution Franchise
The Distribution Franchise is one of the types of business operation where the franchisor “transfers” business know-how to the franchisee in the form of goods and knowledge of how to sell it. Therefore, the distribution franchise is exclusively focused on the sale of goods delivered by the franchisor, and the facility is arranged according to specifications and under the franchisor’s trademark/brand.
The most often Distribution Franchise are:
- Gas stations and car equipment
- Pharmacy and health
- Cosmetics, jewelry, and gifts shops
- House and yard
- Household appliances, technology, IT
- Consumer goods
- Sports equipment
- Kids shops
- Clothes and shoes
The development of distribution franchises began to take place before the development of service franchises. The trend first took root in Western Europe and the United States after World War II, and much later, in Central and Eastern Europe – after 1989, with the beginnings of free-market formation.
It is considered, among other things, that this is due to the fact that distribution (sale) was easier to develop than a service activity. Retail standardization is simpler than is the case with a service business unit, where much more skill is required to precisely and practically design and standardize procedures in the way that service is performed.
In Europe in the early 1990s, high trade margins ensured a rapid return of investment in retail facilities, and this is the main motive for developing these types of franchises in that particular territory. In developed systems such as the US market, on the other hand, distribution franchises continued to develop because such expansion of the system increased the value of the brands, and it was easier to correct the choice of product range, knowledge, and sales skills.
The Distribution Franchising concept should not be equated with the concept of Product Distribution Franchising. The Distribution Franchise indicates the commercial nature of the activity (trade-in products). In contrast, the Product Distribution Franchise is the transfer of knowledge within the techniques of distribution of goods – products and services.
What is a Service Franchise
Service Franchise is one of the types of business operation where the franchisor gives the franchisee his know-how in the form of recipes and service execution procedures. It is such a form of franchising where the franchisee provides services using the know-how, trademark, and other protected features of the franchisor. The areas in which service franchises are particularly represented are catering and hospitality.
The Service Franchise activities:
- Educational services
- Financial services
- Real estate services
- Business services
- Tourism and hospitality
- Hairdressing, beauty salons, and fitness
- Gastronomy and Catering
As we already pointed out, service franchises have developed more slowly than distribution franchises because it is much more difficult to standardize service procedures that must be carried out within a particular business unit. A service franchise, in fact, requires a very precise definition and formulation of the procedures that are required to deliver the service to the end customer.
It should also be noted that the level of development of service franchises depends on social habits and the current “fashion” and demand for particular types of services.
For example, in order that is possible(profitable) to develop a larger number of fast-food franchises, it is necessary that consumers start eating outside their homes. The fact is that most European citizens use this type of service less compared to US and Canadian consumers. The US and Canadian citizens have developed strong habits of eating out or using take-out food service, and the habit of hosting guests in houses rather than going out to a restaurant is almost extinct.
When we mention fast-food types of franchises first thought that comes to mind is McDonald’s. A lot of consumers use McDonald’s franchises services on a regular/daily basis, and this is because US and Canadian citizens have a habit of eating out.
Also, an average US citizen will wash laundry in the laundry shop, but in most other countries, it is normal to wash laundry at home. These are just some examples that will show you how important it is to know the habits of people(potential users of your services) from your area/country.
Consequently, there are noticeable differences in the number of service franchise systems operating in Europe( except the UK) and in more developed markets, such as the US and Canada markets. However, habits are changing, and every year the number of systems that operate in accordance with the principles of service franchises is growing even in other markets and countries.
The service types of franchises should not be confused with the Business Format Franchises. A service franchise refers to service operations ( the service is what is offered to the end customer and it is the subject of franchising), while a business format franchise is the transfer of know-how about the entire business model (in the form of comprehensive procedures that allow starting and running a business, training the franchisee and his staff, as well as providing ongoing care and support) this is also applied to products and services.
What is Production Franchise
The production types of franchises are one when the franchisor transfers its know-how to the recipient in the form of production technology and technical expertise. In the case of a production franchise, the subject of the franchise agreement is the production of certain goods according to the specifications and technology supplied by the franchisor. The goods that will be produced are placed on the market under the label of the franchisor.
When we talk about franchised production, some authors often mention Coca-Cola, but this is, in fact, licensed production. When we mention differences between franchise vs. license, you must be aware that in order to be able to call a license a franchise, there should be a constant transfer of knowledge and technology (know-how) for the entire duration of the license. But, knowledge and know-how should not only refer to the production technology but also to the process of sales, marketing, etc.
What is Mixed Franchise
This is one of the types that is based on the three forms of franchising – production, distribution, and services. Mixed franchises most often occur when the franchisor is a manufacturer, and the franchisee distributes products and provides services related to their application (e.g., cosmetic companies establish a network of stores and beauty salons).
As we can see in the above example, the special feature of the mixed franchise is the so-called “two-track” activity that is carried out by the recipient because, in addition to distribution (sales of cosmetics), the recipient also conducts service activities related to beauty care.
What is Product Distribution Franchising
Production Distribution falls under one of the types of franchises in which the franchisor (distributor or manufacturer) provides (transfers) knowledge and technology (know-how) to the franchisee in the form of an assortment of products or services; after that, the franchisee has the right to sell/provide a specific range of goods or services.
The product distribution franchise should not be confused, as we have mentioned already, with the concept of a distribution franchise – a Product Distribution franchise is a transfer of technology (know-how) related to the distribution of products and services, so in both cases, it can be a product distribution franchise ), but the distribution franchise indicates exclusively the commercial nature of the business (not the services).
Like all “living” systems, the franchise business model is evolving every day. In the first phase, the franchisor is more focused on developing its own network, and it will provide the franchisee his know-how in the form of goods or service assortment. This type of franchise, as we have said, is called a Product Distribution franchise.
However, over time and with the development of the system itself, the franchisor will shift the focus on improving the quality and functionality of the system so it will begin to develop additional elements of its own know-how. This will happen at the moment when the franchise package starts, including all the elements of know-how needed to start a business – and not just the range of goods or services.
When the franchisor provides ongoing support according to pre-established rules, then such a system can be called a business format or business concept franchise.
What is Business Format Franchise
Business Format is one of the many different types of franchises, and its peculiarity is that the franchisor provides the franchisee with all his knowledge (know-how) through the transfer of the entire business concept. It can be said that Business Format Franchise represents the highest degree of franchise comprehensiveness because the provider transmits to the recipient all elements of the business.
In this type of franchise, a franchisor will help with design, training, equipment, sales or service, internal organization, promotion, and marketing. The recipient will gain knowledge that relates not only to selling products or providing services it will also have help with how to run a complete business.
A business format franchise should in no way be confused with the service franchise. The service franchise indicates the service nature of the business and the transfer of knowledge concerning the provision of services, while a business format franchise will transfer all know-how.
What is Direct Franchise
The direct franchise is when the franchisor closes a franchise agreement with one franchisee and gives him the right to use the franchise trademarks in a certain territory. This is the simplest and most common way to develop a franchise system. The franchise agreement is closed directly and indirectly between the provider and the recipient.
In this type of franchise, the franchisor gives the recipient a license and has constant control over the activities and operations of the franchisee (provides assistance and counseling, training, conducts marketing activities and advertising …).
Types of Franchises By Area Representation
When a franchisor starts a “remote” franchise system (e.g., other countries, new towns, etc.), it is possible that it will be difficult to provide services directly, and controlling franchisees will be less efficient. It should then be considered to transfer some of its rights to an intermediary.
3 types of franchises by the area representation:
- Multiple franchises
- Regional representation models
What is the Concept of Multiple Franchises
The multiple franchise business concept is also called a development contract (area development, multiple-unit); it is used when the franchisor wants to open a larger number of stores in a certain territory within a certain period of time.
These types of contracts are signed directly with the recipient or so-called ”franchises developer”. The task of the franchise developer is to open a certain number of stores in a specific territory, all in accordance with the defined deadline. A typical development contract is a framework contract since it does not transfer a franchise license.
To open each individual point of sale, it is necessary to close a direct franchise agreement between the provider and the recipient.
When a franchisor doesn’t want or doesn’t have the possibility because of its location to recruit and train a large number of individual recipients, then the multiple franchise concept is used to establish control over the new market area – franchise developer will do that work for the franchisor.
What is Master Franchise/ Sub-franchising
Based on the contract, a master sub-franchising relationship is established so that the franchisor gives the franchisee (in this case, the master franchisee) the exclusive right to use the franchise package in a precisely defined area. These types of franchises are used when the franchisor goes overseas and wants to expand to the international market.
Therefore, the provider gives the partner (recipient of the master franchise) the exclusive right to give a “sub-franchise” in his territory of operation by closing a franchise agreement with new users. A sub-franchise is a complex business relationship because it has three contracting parties (the provider, the recipient of the master franchisee, and the new franchise recipient, or the recipients, if there are more than one).
Unlike the model of multiple franchises, the recipient of a master sub-franchise has a large number of franchisor duties, so we can see that he is the provider of franchises for his recipients. He also gets the right to propose changes to the franchise agreement and the franchise package. Also, he can propose some changes in the way of the operation because often the market(sales) depends on the habits of certain countries’ citizens.
But, the franchisor retains full control of the system, and the master sub-franchisor must ask approval for all the changes that will be . Sub franchising is mainly used to create franchise systems in countries where the business environment is significantly different from that in the franchisor country.
What is Regional Franchise Representative
A regional representative or area developer can be a person or company who has the right to represent a franchisor in a certain territory. The regional representative has the right to find potential franchisees, with whom the franchisor could later conclude a franchise agreement directly.
Regional franchise representation, in the simplest way we can be described as something between sub-franchising and the franchisee. It can also be described as a bridge between the potential franchisee and sub-franchise.
But, the regional agent is not entitled to sign the franchise agreements: all contracts are closed directly between the franchisor and the franchisee, and all fees are paid directly to the franchisor’s account. The duties of the regional representative are limited to local advertising, training, and supervision of franchisees.
From the aspect of the provider, the appointment of a representative overcomes the problem of the “provider and recipient distance” because distance can cause less control over the system.
In recent years, the so-called “Corner franchising” model has become more common. With the franchise corner agreement, the exclusivity of the territory is reduced to a minimum. In this way, a large number of different franchise units can be opened, and the service and organization work is better distributed between all the parties in the franchise system.
As you can see, franchises really have a lot of different types of operation. If you want to start a franchise or just want to learn a little more about this business concept, it is good to know all these things. Franchising is a business concept of the future, so there will be a lot of development in every aspect of this process.
If you are from the US, Canada, or any other country in the world, you must be aware that a franchise can be a good start for your entrepreneur carrier. Most often, people think that you need to have a large initial investment to start this type of business, this is true for franchises that are globally known, such as McDonald’s, Subway, etc., but you must be aware that there are also available franchises that start their expansion recently, so the cost of starting that kind of franchise is relatively low.
It is important that you learn all about this type of business because knowledge is most important in every business, and franchising is no exception.