A franchise is an agreement between two legally independent parties, a Franchisor (seller) and a Franchisee (buyer) wherein the franchisor sells a right to market product or service using the trademark or trade name owned by his/her business and the franchisee agrees to market the same adopting the predefined operating methods of the franchisor. Franchisee, apart from the incurred cost on buying also has to oblige to a payment of royalty fees which is periodical and franchisor takes up an obligation to provide continued support to the franchisee, throughout franchise lifetime.
Types of Franchise
Even though the types of franchise can be classified into various categories based on the industry, product and so on; the most recognised classification is based on the type of ownership.
- Ownership on Distribution: It is a type of franchise model where in the franchisee purchases a right to distribute a product as per standard protocols set by franchisor. Best examples of such businesses are Coco- Cola and Company, Ford or Hyundai Cars etc. Such Businesses could be just dealership based and are limited to sales and not the actual production.
- Ownership on Business Replication: It is a type of franchise model wherein franchisee purchases the right to replicate entire business as per standard protocols set by franchisor. The standing examples of such businesses are McDonald’s, Blimpie, IIHT, UPS store etc.
Franchise Based on Unit Type:
- Master Unit: A master franchise unit encompasses an ownership of the purchased unit and right to develop the other centres that would then be the sub centres of the region. In some cases a single franchisee could buy more than one centre in a specific geographical area (a city, town, region, country) with managing operations from one centre and treating rest as sub centres. There are also instances where the franchisor waits for certain number of centres to be started in a region before selling/nominating a master franchise which could then act as service provider to the other already existing units.
- Sub Unit (may be also called single, regional or sector centres): It is a single franchise unit that could be completely independent of or dependent on a master franchise depending on the franchise agreement. A franchise could also purchase multiple single units and operate them independent of each other if allowed by franchisor.
Most of the major franchisors such as Subway, Jan-Pro, IIHT Technologies, and Kumon provide options of either type of ownerships. For easy understanding, let us consider an example of a franchise like IIHT. It was started in India two decades ago and has adopted the franchise business model, after a few years of success, for multiple reasons. It grew very fast through 100s of franchises across the nation, selling both master franchises and region franchises, set up independent wing in China replicating entire operation similar to one in India. It now has centres in Malaysia, Turkey and many African countries. The franchise type is customised as per country requirements, law of the land and best practices.
It is essential to know what a franchise is and various classifications so that as a prospective buyer, you are sure what type of franchise exists and are able to analyse and choose the one that suits you best. You should also explore franchise costs, brand reputation, terms and condition and explore multiple facets of a franchise.