Today we have the second post in our “Franchise Lawyer Special” series!

When deciding on any business structure, there are a number of criteria that you should consider. These include:

  • The nature of the business structure.
  • How easy or difficult it may be to set up this business.
  • How much it costs to set up this business structure.
  • The tax implications your business will attract.
  • The ways in which your assets can be protected.

Generally in a franchising system, a franchisee will pay you (the franchisor) fees and royalties in exchange for the rights to sell the business’s products which are associated with the franchisor’s goodwill. There are three main franchise models that you can structure your franchise according to. These are:

  • Business format franchises
  • Manufacturing or processing franchises
  • Product franchises

Business format franchises

This is perhaps the most popular structure for a franchise. As mentioned above, this format generally allows for franchisees to be given the rights to use the franchisor’s intellectual property to market a service or product. The intellectual property may include the business name, logo and the systems for operating the business. A good example of this general structure is that of many fast food outlets.

Manufacturing or processing franchises

Under this franchising model, the franchisor provides important information about how to create the business product to the franchisee. With this knowledge the franchisee can then create the business products and sell them under the business name. Companies who sell soft drinks usually use this format.

Product franchise

This model allows for the franchisee to sell the franchisor’s product from a retail outlet or from a warehouse. The franchisee’s rights to sell the product are usually limited to a specific territory or specific location to give the franchisee some exclusivity. An example of such a structure would be motor vehicle dealerships.

What about master franchises?

Establishing a master franchise system is a popular approach when you want to establish many franchise networks over specified territories, such as each State. Basically, master franchising allows franchisors to give control of the franchise network in a specified territory to a person called the ‘master franchisee’. There are a wide variety of advantages to this sort of arrangement, generally creating operational efficiencies which allow for increased growth rates of the sub-franchises. However, there may also be disadvantages including the structural complexities and increased administrative requirements of operating such a business structure. You should consider carefully all the implications of establishing a master franchise system before you make any decision regarding your business.

For more information on master franchises, please see an article by the International Franchise Associate website at: http://www.franchise.org/Franchise-Industry-News-Detail.aspx?id=33626

Conclusion

The type of franchising system which is right for you greatly depends on the type of business you have and the type of products or services that you are selling. It may be that after some consideration you will find one business structure is more suitable to your business goals than another. It is always a good idea to get some advice on what options are available to you if you are in doubt. We suggest speaking with a franchising lawyer or your accountant for advice on the best option for you.

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Felix McKnight
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