In recent years in the UK franchising has greatly increased in popularity. In the last year alone the contribution of franchised business to the economy increased by over £5 billion to 12.4 billion. There is no doubt that franchising is now a significant part of the UK economy.
A basic definition of franchising is that it is an agreement where a company sells the rights for another person or group to sell its products or services. However in reality franchising is more complex and there are a number of different types of franchise agreement.
Although every franchise agreement will differ to some extent in general franchising can be divided into four distinct categories –
Manufacturing Franchises
In this type of agreement the franchisor allows the franchisee to manufacture its products and to sell them using its brand and trademarks. This type of arrangement is particularly common in the food and beverage industry. The franchising company receives an initial fee and depending on the agreement may also receive an additional fee for every unit of the product sold.
Business Franchise Ventures
A business franchise venture is an agreement where the franchisee purchases and distributes products for the franchising company. The franchisor typically locates and provides the client base for the franchisee to manage. An example of a business franchise venture is the vending machines that can be found in many public areas and workplaces. The franchisee buys the vending machines, maintains them and takes a share of the machines takings.
Product Franchises
In this type of franchise the franchising company uses the agreement as a method for the distribution of its products. The franchisee is given the right to use the brand name of the franchisor to sell its products. In product franchises the franchisee will pay a franchise fee or may alternatively agree to purchase a minimum amount of stock to sell on.
Business Format Franchises
This is the most complex type of franchise agreement and involves a broader relationship between the franchising company and its franchisees. In this agreement the franchisee’s investment includes the purchase of the operating processes of an existing business including its brands and products. Training and support is also likely to be provided to the franchisees. A common example of business format franchising is fast food franchises.