2 Types of Franchise Agreements

The franchising industry is a rapidly growing sector of business, with an estimated 773,603 franchise establishments in the United States in 2020. Franchising offers entrepreneurs the opportunity to start their own business with the support and guidance of a well-established brand. However, before entering into a franchise agreement, it’s important to understand the different types of franchise agreements available.

There are two primary types of franchise agreements: product distribution franchises and business format franchises.

Product Distribution Franchises

Product distribution franchises are the most common type of franchise agreement. In this agreement, the franchisee sells the franchisor’s products under their own business name. The franchisor provides the franchisee with the products, training, and marketing materials to sell the products effectively.

One example of a product distribution franchise is a car dealership. The franchisor provides the dealership with the vehicles to sell, and the dealership is responsible for selling the vehicles to customers. The dealership is typically responsible for the operating costs of the business, such as the rent, utilities, and payroll.

Business Format Franchises

Business format franchises are more complex than product distribution franchises. In this type of franchise agreement, the franchisor provides the franchisee with a complete business model, including the products or services to sell, marketing and branding materials, training, and ongoing support. The franchisee operates the business under the franchisor’s name and must follow specific guidelines and procedures provided by the franchisor.

One example of a business format franchise is a fast-food restaurant. The franchisor provides the restaurant with the menu, branding, marketing materials, and training on how to operate the business. The franchisee must follow specific guidelines on how to prepare the food, how to serve customers, and how to operate the business. The franchisor may also provide ongoing support and training to ensure the franchisee’s success.

Final Thoughts

Before entering into a franchise agreement, it’s important to carefully review and understand the terms of the agreement. Each franchise agreement is unique and may have different obligations and requirements. As a potential franchisee, it’s important to conduct thorough research and consult with legal and financial professionals to ensure that you have a full understanding of the franchise agreement and the associated costs and risks. Understanding the types of franchise agreements available can help you make an informed decision about which franchise is the best fit for your business goals and needs.