Business Format Franchise Definition
A business format franchise definition will vary from one franchise to the next.3 min read
2. How Is the Franchisor and Franchisee Relationship Created?
3. What Is the System of Delivery?
A business format franchise definition will vary from one franchise to the next. There are different arrangements that can be made between franchisees and franchisors. One such arrangement may include the right for the franchisee to include certain designs that the franchisor owns. This is in addition to the right to sell the goods or services of the franchisor. Other elements that the franchisee may be given the right to sell or use include:
- Operating procedures.
- Group advertising.
- Quality control procedures.
- Accounting systems.
- Reservation systems.
- Software programs.
What Is a Franchise Relationship?
When a person takes part in a product distribution franchise, this means the person is able to sell the franchiser's products/services only. The franchisee cannot sell any other brands. This type of relationship is very much like the relationship between a supplier and dealer except for the fact that the franchisee is limited to selling only one brand.
A product distribution franchise is commonly seen in the automobile industry. For example, a Ford dealership is limited to selling only Ford vehicles. It is also not uncommon to see this type of franchise in the tech industry. When operating according to a product distribution format, the franchisee tends to maintain much more freedom than he or she would have if it was a business format franchise.
When a business format franchise is created, this means the business integration aspect of the relationship is much more complete than it is in a product distribution franchise.
The business format franchise approach tends to be the most popular. It is commonly used by those who are wanting to be entrepreneurs. The franchisor will provide a clearly outlined formula for the franchisee to follow, including concepts relating to products, advertising, employee training, and more.
The franchisee will be responsible for operating the business, but he or she will have products or services provided by the franchisor to sell. Most times, the franchisor will allow the franchisee to use his trademark. This is a win-win for both parties. The franchisor increases his brand awareness while the franchisee gets to hop aboard a business that is already experiencing success.
How Is the Franchisor and Franchisee Relationship Created?
A legally binding contract will be created that finalizes the relationship between the franchisee and the franchisor. The contract will include several sections, including:
- Name of parties.
- Products and services to be sold.
- Manuals and standards.
- Operating procedures.
- Marketing operating systems.
- Support facilities.
Any time you hear of someone talking about a franchise business, there is a good chance they are talking about a business format franchise.
When this type of relationship is created, the franchisor allows the franchisee the right to use his trademark and service marks. These marks are to be used for marketing purposes to help sell the franchisor's products and services. The franchisee will not create a new name for the company. Instead, he will have to use the franchisor's brand name. Much of the time, consumers do not even realize they are purchasing products from a franchised company.
What Is the System of Delivery?
The system of delivery is what you need to understand when it comes to going into a franchise business relationship. For example, McDonald's doesn't franchise French fries. Instead, it franchises a way of business. It franchises its operational process. You will likely be able to tap into the product source of the franchisor.
You will have to pay a fee in order to operate your company under the brand name of the franchisor. This fee may or may not be based on your sales. It could be a flat fee. It just depends on the contract you sign when you go into the relationship with the franchisor. Of the utmost importance is that you uphold the brand's reputation as you are operating your company under its name. A franchisor has the right to terminate the relationship if you don't meet certain standards, which are typically outlined in the contract.
This is why it is of extreme importance to read through the entire contract before you buy into a franchise. There's a chance you may come across a term or condition that you are not able to comply with. If this is the case, then you will need to look for a different franchise opportunity.
If you need help with understanding business format franchise definition, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.