Business Format Franchise: Everything You Need to Know
A business format franchise provides franchisees with the right to use the franchisor's name, as well as the ability to use proprietary systems and processes.3 min read
A business format franchise provides franchisees with the right to use the franchisor's name, as well as the ability to use proprietary systems and processes they would otherwise be unable to.
Definition of a Business Format Franchise
Franchise opportunities these days are usually known as a business format franchise. A business format franchise is almost exactly what it sounds like, when everything is said and done. In standard business format franchise structures, a franchisee will be granted a license by the franchisor to make use of their principal trademark. This is one of the key aspects of a business format franchise.
When you are the franchisee in a business format franchise, you'll operate your business using the principal trademark that belongs to the franchisor. This is usually the name you'll use to identify your company to the public and is commonly referred to as the brand. Some examples of business that employ a business format franchise are:
- The UPS Store
The brand isn't the only thing you have access to when you're the franchisee in a business format franchise. You'll also be granted rights to make use of the franchisor's proprietary systems. However, this also means you're obligated to use those systems and meet any standards the franchisor has in place. Examples of things you might gain access to as the franchisee include:
- Initial training
- Standardize buildout plans
- Operations manuals
- Continuous support
- Point-of-sale system education
- Key functionalities
Franchisees are also given the right to sell products and services that the franchisor might otherwise restrict to prevent competing companies' ability to effectively compete. This might include things like:
- Branded products
- Proprietary recipes
- Service suites
- Specific methodologies
It is important to note that a business format franchisee will usually be obligated to sell the products and services that are owned by the franchisor. This usually means they are also restricted from selling unapproved products and services that the franchisor might consider to be competitive in nature. This makes it important for potential franchisees to perform due diligence and make sure they're reasonably confident in their ability to succeed in meeting the franchisor's expectations.
Product Distribution Franchise
In most cases, companies that are looking for an alternative to the business format franchise will select a structure known as the product distribution franchise. In this type of franchise, the franchisee is normally called a dealer or a distributor. Dealers are given the right to use the franchisor's name when selling their products, but they're not given the kind of support — such as access to proprietary systems and training — that would be available in a business format franchise. As a result, franchisees normally pay some sort of fee or buy the minimal number of products they need to make a profit.
In most scenarios, the products being sold will require some sort of preparation or service by the franchisee, before and after a sale takes place. Product distribution franchises are quite similar in function to the kind of relationship that exists between a supplier and a dealer. There are some unique differences between these two types of relationships, though. The first difference worth noting is that the franchisee can choose to sell the franchisor's products on a semi-exclusive basis or on an exclusive basis.
Another noteworthy difference is that franchisees in this type of relationship typically get more services from their franchisor than they would in a standard dealer-supplier relationship. Common scenarios that make use of the business format franchise include:
- The gasoline industry
- The automobile industry
- Mobile device distributors
As an example, a store might agree to only sell certain products and exclude some others. In most cases, the franchisee will sell only the franchisor's product. In many cases, this also involves the franchisee incorporating some of the franchisor's business activities into their own. However, the franchisee has much more freedom and independence in this type of franchise than they would under a business format franchise.
There are a number of other types of franchises, including:
- Management franchises
- Manufacturing franchises
The specific type of franchise that is in play will ultimately determine the extent to which the franchise in question will affect how the franchisee operates their business.
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