Types of Franchise

Production distribution

In franchising, semi-independent business owners pay for a franchise plus fees and royalties to a franchisor for the right to sell its products, services and often to use their business format and system. This is not the same as an independent business as you are at the mercy of rules and regulation the franchisor has established in developing their product or services including specific ways of producing or selling the product.

Production distribution is licensing the franchise to sell a specific product or products under the manufacturer's brand name and trademark through a selective and limited network and is used to market such things as food, like the fast-food franchises or soft drinks such as Pepsi, Coca Cola or gasoline such as Exxon and Texaco.

Product distribution is really trade name franchise. The franchisee has the use of a product or trade name but has no supporting relationship with the franchisor, except perhaps for training. The franchisee does however benefit from the marketing and advertising efforts of the franchise system. Another pro in this system is the products are generally the older established ones with a proven customer base.

Business Format

A business format provides the franchisee with a complete business format, which can include a license for a trade name, the products or services to be sold, the building, method of operation, communication and a quality control process. You purchase the right to use all the elements of the business operation. McDonalds and Starbucks are examples of the business format franchise.

In the business format, there is always an on-going relationship with the owner. You will pay an initial fee as well as an ongoing royalty fee and in turn the franchisee gets a complete business package that would take years to develop on your own. It also gives you, the franchisee a better ability to compete through the established brand identity and marketing power of the system.

The franchisee has the right to use the trademark and logo and gets a complete operational business. Holiday Inn, Midas and Century 21 are some of the Business Format type franchises seen today.

The business format is the most popular type of franchise business because of the relationship between the franchise and the franchisee. It's a lot like having a company work for you.

In any franchise deal, you must remember that you are not ‘buying' a business. You are ‘leasing' the right to sell the product, use the products name and benefit from the franchise's media advertisements.