FOUR TYPES OF FRANCHISING

According to Webster's Encyclopedic Unabridged Dictionary, a franchise is permission granted by a manufacturer to a distributor or retailer to sell his/her products and the territory to which such permission extends. The legal definition expands this meaning -- a franchise may also extend the right to use a predetermined method for marketing products or services through outlets that use a known name or trademark. The International Franchise Association, the major trade association in franchising, defines franchise as a "continuing relationship in which the franchisor provides a licensed privilege to do business, plus assistance in organizing, training, merchandising and management in return for a consideration from the franchise." There are four basic types of franchises used by business in the United States.

Product Franchise. Manufacturers use the product franchise to govern how a retailer distributes their product. The manufacturer grants a store owner the authority to distribute goods by the manufacturer and allows the owner to use the name and trademark owned by the manufacturer. The store owner must pay a fee or purchase a minimum inventory of stock in return for these rights. Some tire stores are good examples of this type of franchise.

Manufacturing franchises. These types of franchises provide an organization with the right to manufacture a product and sell it to the public, using the franchisor's name and trademark. This type of franchise is found most often in the food and beverage industry. Most bottlers of soft drinks receive a franchise from a company and must use its ingredients to produce, bottle, and distribute the soft drinks.

Business opportunity ventures. These ventures typically require that a business owner purchase and distribute the products for one specific company. The company must provide customers or accounts to the business owner, and, in return, the business owner pays a fee or other consideration as compensation. Examples include vending machine routes and distributorships.

Business format franchising. This is the most popular form of franchising. In this approach, a company provides a business owner with a proven method for operating a business using the name and trademark of the company. The company will usually provide a significant amount of assistance to the business owner in starting and managing the company. The business owner pays a fee or royalty in return. Typically, a company also requires the owner to purchase supplies from the company.