1. The Types of Franchising
Four Types of Franchising
How Does a Franchise Work?
How to Structure a Franchise
What is Included in a Franchise Agreement?
Types of Franchises
By Tanisha Coffey, eHow Contributor
The main distinguishing feature of a franchise is its structure--in other words, the rights that the
franchisor allows a franchisee to have regarding the franchisor's products or services. However, a
secondary classification of franchise types does exist; it's based on the type of franchise
ownership. The following is an overview of the types of franchise structures and ownership
classifications.
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Buying a Franchise
Franchise Franchising
1. Manufacturer Franchise Structure
o One of the lesser-known franchise structures is called a manufacturer franchise.
The focus of this type of franchise, as the name suggests, is on the manufacturing
phase of a product's lifecycle. Owners of a manufacturer franchise have the right
to manufacture a franchisor's product. In some cases, he also may have the right
to sell and distribute the products as well.
Product Franchise Structure
o Those who buy into a business structured as a product franchise are purchasing
the right to sell and/or distribute a particular product from a manufacturer. For
example, an auto repair shop owner may decide that he wants to sell tires in order
to add a revenue stream for the business. In order to have inventory on hand,
selected tire manufacturers may require that the auto shop become a product
franchisee before it allows the shop to carry its tires.
Business Format Franchise Structure
o The most common type of franchise structure is the business format franchise. In
this type of franchise, the franchisee is buying the right to more than just
producing and distributing a franchisor's product as in the manufacturer type of

2. franchise, and more than simply selling a franchisor's product as in the product
type of franchise. Instead, entrepreneurs who choose the franchise business format
are really purchasing the franchisor's strategic business operation model, which
has proven to be effective; and the right to produce, distribute and/or sell the
franchisor's goods and/or services comes along with that purchase.
Single-Unit Franchise Ownership
o As stated earlier, types of franchises are categorized not only by the structure but
also by ownership. The most common type of franchise ownership is one that is
offered as a single-unit franchise. This type of franchisee purchases the right to
own and operate one franchise location. Most entrepreneurs who invest in a
franchise---whether as a business format franchisee, a product franchisee or a
manufacturer franchisee---buy into the franchise as this type of franchise owner.
Multi-Unit & Area Development Franchise Ownership
o Aggressive or experienced franchisees may opt for a more involved type of
franchise ownership such as multi-unit franchise ownership or area development
franchise ownership. The two types of franchise ownership types are similar in
that the franchise owner has more to manage than a single-unit franchise owner
and they differ only in how and what is managed. The multi-unit franchise owner
manages multiple franchise locations while the area development franchise owner
typically owns a single franchise that has the right to do business across a vast
area---multiple cities or states, for instance.
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franchises.html#ixzz1np13Hahx
Entering a Franchise Agreement
This brochure has been prepared by the Maryland State Bar Association's Public Awareness Committee.
It is intended to inform the public and not serve as legal advice.
INTRODUCTION
Entering a franchise arrangement is one option to start your own business with minimum risk. Although
some franchises offer tried and true plans for business opportunities, prospective franchisees must be
wary of franchisers who appear to offer sure-fire methods for success while struggling themselves to stay
alive in the market. The mere fact that a business is franchised is not a guarantee of its success. If you
are considering entering a franchise agreement, be prepared to do the same research and careful
planning that go with any start-up venture.

3. THINGS TO KNOW BEFORE CHOOSING A FRANCHISE
Before you decide that franchising is right for you, consider several factors. Investigating and closely
comparing three or four franchisers will give you an idea of "norms" in the industry. Information about a
franchiser and its expectations can be obtained from the franchiser and various governmental and trade
organizations. As a prospective franchisee, you should obtain as much information as possible. The list
below is far from being all-inclusive; however, it provides a guide for essential issues to evaluate:
Just as in any business venture, franchised businesses are subject to market fluctuations and
economic trends. You should obtain a thorough analysis of an area's demographics to decide if
the potential location is prime for such an operation. Just because a restaurant is successful in
southern California does not mean it will be successful in Maryland.
Evaluate your knowledge of the franchise business. How much, if any, experience do you have in
the area? If you do not have much experience, decide whether the franchiser's training program
will compensate for your lack of experience.
Be willing to devote a great deal of time, effort and money to the operation. Franchisers often
require that the franchisee be personally involved in the day-to-day operations of the business
and personally guarantee the financial obligations of the business. Do not be deceived. You will
not simply negotiate the deal and wait for the profits to roll in.
Find out how many franchises the franchiser owns. Significant franchiser ownership may show
the franchiser's confidence in its product and create common interests between the franchiser
and franchisee.
The cash needs for the franchise operations are similar to any other start-up business. As a
franchisee, you must pay a franchise fee in addition to financing the premises, equipment,
advertising and operating capital. Franchisers will usually provide an estimate of capital required
to start, but it is best to obtain an independent evaluation.
As a franchisee, you will be required to follow the franchiser's operational requirements. Often,
such requirements are all-encompassing. Therefore, if you are an independent person who
prefers to do things your own way, you should evaluate whether you can operate within the
structures of the franchise.
ENTERING A FRANCHISE AGREEMENT
After narrowing down the field and deciding upon one or two franchises, carefully scrutinize the franchise
agreements. Depending upon the franchiser, you should be able to successfully negotiate some terms of
the agreement. Franchisers generally will not agree to major variations; however, the widely-held notion
tha franchise agreements are nonnegotiable is not true. Below are some issues that may arise when
reviewing franchise agreements. Although these issues will not arise until negotiations begin, keep them
in mind when comparing franchises in the first stages of investigating business opportunities.
You will be required to pay a franchise fee set by the franchiser. Usually, they offer two main
selling points: a trademark and a marketing or business plan. Potential franchisees should assess
the strength and image of the trademark, and its potential confusion with other trademarks.
Consulting an Intellectual Property attorney if possible, may be helpful in making such an
assessment. Moreover, the franchise, agreement should contain specific representations
regarding ownership and genuiness of the trademark. The franchise agreement should also
obligate the franchiser to indemnify you, the franchisee, from any claims by third parties
challenging the validity or use of the trademark. Bearing in mind the potential location of the
operation, you should arrange for an independent evaluation of the business strategy.
In addition to the up-front franchise fee and royalties that you may be required to pay, additional
hidden costs may be associated with the franchise operation. These hidden costs can come in
many forms such as accounting fees, lease location expenses and supervision fees.
Furthermore, the franchiser may be receiving additional sources of revenue from the franchise
arrangement, such as rebates from suppliers.

4. You should carefully consider the geographic scope of your proposed franchises territory while
keeping in mind its location and your ultimate business plan.
The franchise term is an issue that is sometimes disputed. Franchisers typically grant terms of
eight to 15 years. You, as the franchisee, should ask for a term that allows you to establish the
business and recover your capital costs. Be careful; franchisers can terminate some franchise
agreements at will upon written notice to the franchisee. Although the franchiser may insist on
flexibility, it is not in your best interest, especially if you must pay a substantial up-front fee.
You and the franchiser must also agree upon: the ability to renew the agreement; what will
happen to the franchise if the franchisee dies; whether the franchiser can sell competitive
products; and the amount of ongoing services that the franchiser will provide during the term of
the agreement. While these issues are too complicated to consider here, be aware that important
business and legal issues arise when entering a franchise arrangement. You should consult a
lawyer and an accountant before entering such an arrangement.
SOURCES OF INFORMATION ABOUT THE FRANCHISE
Obtain information from several sources. First, ask the franchiser for a list of all existing and past
franchisees with names, addresses and telephone numbers, and call as many as possible. Ask questions
about the business and about the franchisers representations. Any reluctance by a franchiser to provide
this information should cause concern.
Next, each franchiser doing business in Maryland must register with the State. Registration requires the
franchiser to file a disclosure document, called a prospectus, which contains important information
describing the franchise. By law, the prospectus must provide pertinent details about the franchise offer,
including the franchise fee or information about the way the fee will be set. Moreover, a franchiser must
provide a franchisee with a copy of the prospectus and copy of any agreement involved in the sale of the
franchise. Such copies must be provided either the first time the franchiser and franchisee meet, or within
10 days before any contract is signed or payment is made that relates to the franchise.
If the franchiser will not provide this information, you may contact the Office of the Attorney General to
report this conduct and/or to obtain the prospectus, if one has been filed. You should also contact the
Attorney General's Office and/or a private attorney if the franchiser provides you with false or misleading
information. Write or call: Securities Commissioner, Office of the Attorney General, 200 Saint Paul Place,
Baltimore, Maryland 21202-2020, (410) 576-6360. You may visit the Attorney General's website at
www.oag.state.md.us; franchise information may be found under "Securities."
And finally, the International Franchise Association (IFA), a trade organization located in Washington, DC
provides information about franchise opportunities, individual franchisers and franchising arrangements.
The IFA makes this information available to the public through a series of books, tapes and pamphlets.
For a list of materials, write or call International Franchise Association, 1350 New York Avenue, Suite
900, Washington, DC 20005, (202) 628-8000.
Entering a Franchise Agreement © 1994, MSBA, Inc. Revised 2002
All rights reserved. No part of this work may be reproduced in any form without written
permission from the Maryland State Bar Association.
Top 5 To Try
The Types of Franchising
Four Types of Franchising
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How to Structure a Franchise
What is Included in a Franchise Agreement?

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Types of Franchises
By Tanisha Coffey, eHow Contributor
Print this article
The main distinguishing feature of a franchise is its structure--in other words, the rights that the
franchisor allows a franchisee to have regarding the franchisor's products or services. However, a
secondary classification of franchise types does exist; it's based on the type of franchise

6. ownership. The following is an overview of the types of franchise structures and ownership
classifications.
Related Searches:
Buying a Franchise
Franchise Franchising
1. Manufacturer Franchise Structure
o One of the lesser-known franchise structures is called a manufacturer franchise.
The focus of this type of franchise, as the name suggests, is on the manufacturing
phase of a product's lifecycle. Owners of a manufacturer franchise have the right
to manufacture a franchisor's product. In some cases, he also may have the right
to sell and distribute the products as well.
Product Franchise Structure
o Those who buy into a business structured as a product franchise are purchasing
the right to sell and/or distribute a particular product from a manufacturer. For
example, an auto repair shop owner may decide that he wants to sell tires in order
to add a revenue stream for the business. In order to have inventory on hand,
selected tire manufacturers may require that the auto shop become a product
franchisee before it allows the shop to carry its tires.
Business Format Franchise Structure
o The most common type of franchise structure is the business format franchise. In
this type of franchise, the franchisee is buying the right to more than just
producing and distributing a franchisor's product as in the manufacturer type of
franchise, and more than simply selling a franchisor's product as in the product
type of franchise. Instead, entrepreneurs who choose the franchise business format
are really purchasing the franchisor's strategic business operation model, which
has proven to be effective; and the right to produce, distribute and/or sell the
franchisor's goods and/or services comes along with that purchase.
Single-Unit Franchise Ownership
o As stated earlier, types of franchises are categorized not only by the structure but
also by ownership. The most common type of franchise ownership is one that is
offered as a single-unit franchise. This type of franchisee purchases the right to
own and operate one franchise location. Most entrepreneurs who invest in a
franchise---whether as a business format franchisee, a product franchisee or a
manufacturer franchisee---buy into the franchise as this type of franchise owner.

7. Multi-Unit & Area Development Franchise Ownership
o Aggressive or experienced franchisees may opt for a more involved type of
franchise ownership such as multi-unit franchise ownership or area development
franchise ownership. The two types of franchise ownership types are similar in
that the franchise owner has more to manage than a single-unit franchise owner
and they differ only in how and what is managed. The multi-unit franchise owner
manages multiple franchise locations while the area development franchise owner
typically owns a single franchise that has the right to do business across a vast
area---multiple cities or states, for instance.
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