Franchising is a way for one business to operate under another’s brand, taking advantages of established systems and processes.

It falls broadly into three categories:

• System franchise, or business format franchise.
  This is the most common form of franchising. The franchisee operates under the franchisor’s brand and follows a prescribed way of managing, marketing and operating the business. The goal is consistency across all products, services and stores.
• Product franchise.
  In this case, the franchisee acts as a distributor for a product such as fuel or motor vehicles. 
• Processing or manufacturing franchise.
  Here, the franchisee has the right to manufacture goods and sell them under the franchisor’s brand name. In some cases, this will be a part of a manufactured product, such as a car.

Franchisees working in different ways

• Owner-operator
  The owner-operator is hands-on, working alongside employees and running the day-to-day operations of the business. 
• Investor
  Some people buy one or more franchises purely as investments. They have no intention of working in the business and rely on a manager to run it for them. 
• Single-unit franchise
  Most franchisees begin with the rights to own and operate a single outlet. Some go on to purchase more as multi-unit owners.
• Multi-unit franchise
  A franchisee is awarded the right to operate more than one outlet within a specified territory.
• Area development franchisee

This grants you the right to develop a specific territory by opening an agreed number of outlets in a scheduled rollout.

• Master franchisee
  Sometimes referred to as the sub-franchisor, the master franchisee takes on the responsibilities of franchisor for individual franchisees in, for example, a specific state or territory. You may join the brand as a master franchisee or be offered the role as the franchise expands. Master franchisees have the potential to influence the growth of the franchise and receive percentage royalties from the franchisees they oversee. However, the role can be very demanding and the initial set-up fee is often very high.

Different funding models

In general, the franchisor charges a fee for buying into the brand and the franchisee sources finance to cover that. If good candidates are being excluded by a high initial investment the franchisor might opt to take on some of the cost. 

Joint venture

The franchisor and franchisee split the initial investment for the duration of the agreement. The split is generally – though not necessarily – 50/50. The franchisee usually runs the business while the franchisor takes on the role of silent partner. 

In some cases, the franchisee has the right to buy out the franchisor. In others, the franchisor guarantees all of the funding required to establish and operate the business. 

This contract is always completely separate from the franchise agreement.

Manage to own

You start out by managing a store then move on to owning your own outlet in the franchise. The franchisor may subsidise the initial cost of investment. 

HELPFUL HINT

Multi-unit franchisees are increasingly popular, as franchisors can grow the business with existing franchisees who already understand the model. However, expanding into a second or third unit isn’t guaranteed, so find out what the franchisor’s parameters are before you sign up to your first franchise.