A franchise may be any of the following business types:
- Sole proprietorship
- Corporation
- Limited liability company
- Other business type
What types of businesses are franchises?
Types of Franchises
- Business Format Franchise. The vast majority of franchises use the business format. ...
- Conversion Franchise. The opposite of a business format franchise, conversion franchises occur when a company absorbs smaller businesses.
- Investment Franchise. ...
- Job Franchise. ...
- Product-Driven Franchise. ...
How to run a successful franchise business?
- Choose the right franchise. Franchisees whose skills and interests are a good fit for the business are usually more successful than those purely tempted by the financial opportunity.
- Follow the franchise system. ...
- Have a business plan. ...
- Take advantage of franchisor support. ...
- Be friendly with your franchisor. ...
- Have sufficient funding. ...
Should you start a franchise business?
There are many benefits to running a franchise, as there are benefits to starting a new business. The truth is, which one is right for you will depend on what your goals are and the type of entrepreneur you are. If you start a business from scratch, you’ll have your work cut out for you.
What are the advantages and disadvantages of franchise business?
These include:
- Limited control: As a franchise business owner, you have limited control. ...
- Costs: Opening a franchise is not a cheap endeavor. ...
- Potential leadership changes: There is always the possibility that the franchise can be acquired and new leadership will move in.
- Lack of privacy: Being a franchisee also comes with a lack of financial privacy. ...
What are the structures to consider when purchasing an existing franchise?
What is franchising in business?
What is franchise trust?
Why do companies have two tiered companies?
Why do trusts have to distribute profits?
What happens if you wind up a company?
Is a franchise a separate entity?
See 4 more
About this website
How to Structure a Successful Franchise System - RHINO7
Rhino7 has a long track record of successfully working with fledgling franchisors to help grow their brands into national franchise systems. Achieving success in franchising is all about first creating a very detailed and easy-to-replicate structure, then meticulously executing against that structure throughout each franchise unit.
What are the structures to consider when purchasing an existing franchise?
These include: operating as a sole trader, a partnership, a company, a two-tiered company structure or through a trust. This article considers the advantages and disadvantages of each franchise business structure.
What is franchising in business?
In the case of a franchise system, it is common for the franchisor to be the owner of the intellectual property of the business. They will then license this to your company for use in operating the franchise. This means that these more valuable assets would not be at risk if your company fails.
What is franchise trust?
Franchise Trust Structure. The final structure to consider operating your franchise through is a trust. There are two different types of trusts, discretionary (family) or unit trusts. With either trust type, there is a trustee that owns the assets of the business and operates the business on behalf of the trust.
Why do companies have two tiered companies?
Some businesses decide to set up a two-tiered company structure to protect the valuable assets of the business. This is usually done through a holding company and operating company relationship. The holding company owns the assets and intellectual property of the business and the subsidiary company is the operating company.
Why do trusts have to distribute profits?
The trust must distribute the profit/income of the trust to the beneficiaries each financial year to avoid paying the highest tax rate. This can be a problem if your business needs working capital or wants to attract investment.
What happens if you wind up a company?
If you needed to wind up the company, you could potentially lose all of the business’ assets. This is important to consider if you want to have these assets for future use.
Is a franchise a separate entity?
Setting up a proprietary limited company to operate a franchise will protect your personal assets, as a company is a separate legal entity. It is capable of owning its own assets and liabilities and entering into contracts on behalf of the franchise. It is a more straightforward structure to operate than a two-tiered company or trust.
What are the main franchise structure types?
There is no single typical franchise structure used by every franchise system. There are four which are the most common:
How do I choose the right franchise structure for me?
Selecting the right kind of franchise structure for you is often a matter of assessing your skills and matching them with the available franchise opportunities.
The franchise structure which fits your skills – your options
Need to know more about the type of franchise structure that would be the best match for your talents?
What is franchise business?
This is another franchise business structure designed to help you protect your assets. It entails a relationship between an operating company and a holding company. This splits up the legal responsibilities and ownership of the assets for more protection. The holding company will have control and ownership of the assets, while the operating company will be able to enter into contracts and has the liabilities.
What are the disadvantages of a 2 company structure?
The biggest disadvantage to this structure is the expenses and difficulty in managing it. As there must be 2 distinct companies, you will need to establish twice the amount of legal documents, paperwork and accounts.
What happens if an operating company is sued?
The biggest benefit of this is that if the operating company is sued, the assets are protected because it is technically owned by the holding company. However, as there are some exceptions to this, you should discuss with a lawyer before deciding on this structure.
Is it good to have a franchise?
So while it was beneficial to have it separate, it is also a risk. The good thing about a franchise is that because it is a branch of the parent company, you are operating under their license. This can actually offer some more protection for you.
Is a franchise a propriety limited company?
It will be a separate legal entity, capable of owning its own assets and liabilities. This way it can all be separated from you personally. This is also the easiest business structure to operate as there will be only one set of contracts and regulatory requirements.
What Is a Franchise?
A franchise is a type of license that grants a franchisee access to a franchisor's proprietary business knowledge, processes, and trademarks , thus allowing the franchisee to sell a product or service under the franchisor's business name . In exchange for acquiring a franchise, the franchisee usually pays the franchisor an initial start-up fee and annual licensing fees .
What is franchise contract?
Franchise Basics and Regulations. Franchise contracts are complex and vary for each franchisor. Typically, a franchise agreement includes three categories of payment to the franchisor. First, the franchisee must purchase the controlled rights, or trademark, from the franchisor in the form of an upfront fee.
What Are the Risks of Franchises?
Disadvantages include heavy start-up costs as well as ongoing royalty costs. By definition, franchises have ongoing fees that must be paid to the franchisor in the form of a percentage of sales or revenue. This percentage can range between 4.6% and 12.5%, depending on the industry.
How Does the Franchisor Make Money?
Typically, a franchise agreement includes three categories of payment to the franchisor. First, the franchisee must purchase the controlled rights , or trademark , from the franchisor in the form of an upfront fee. Second, the franchisor often receives payment for providing training, equipment, or business advisory services. Finally , the franchisor receives ongoing royalties or a percentage of the operation's sales.
What does a franchisor receive?
Finally, the franchisor receives ongoing royalties or a percentage of the operation's sales. A franchise contract is temporary, akin to a lease or rental of a business.
How long does a franchise contract last?
It does not signify business ownership by the franchisee. Depending on the contract, franchise agreements typically last between five and 30 years, with serious penalties if a franchisee violates or prematurely terminates the contract.
When a business wants to increase its market share or geographical reach at a low cost, it may franchise its product?
When a business wants to increase its market share or geographical reach at a low cost, it may franchise its product and brand name. A franchise is a joint venture between franchisor and franchisee. The franchisor is the original business. It sells the right to use its name and idea. The franchisee buys this right to sell the franchisor's goods or services under an existing business model and trademark .
What are the different types of business structures?
There are three types of business structures which include the partnership, sole trader and the proprietary limited company. These business structures are applicable to any business owners interested in franchising their businesses.
What is a partnership business?
In a partnership the business is owned or operated by several other people. There are two types of partnerships which are the limited partnerships and general partnerships. In limited partnerships you have the general as well as the limited partners with whom the general partners run the business and the limited partners serve merely as investors. In a general partnership however the partners manage the company and are responsible for the partnership including its liabilities and debts. Therefore if you are interested in engaging in a partnership type of business structure the general partnership would be the best option as compared to a limited partnership. In a partnership you get the advantage of not being taxed based on income rather losses and profits are passed through the individual partners.
What is a sole proprietorship?
Sole proprietorship is the simplest structure and comprises of just the individual that is both owner as well as manager of the business. The tax specifics of this type of business structure are appealing in the sense that these figures are inclusive of your personal income tax return.
What is a general partnership?
In a general partnership however the partners manage the company and are responsible for the partnership including its liabilities and debts. Therefore if you are interested in engaging in a partnership type of business structure the general partnership would be the best option as compared to a limited partnership.
What is a franchise business?
A franchise is a small business. The franchise owner pays the parent company a fee along with ongoing royalties to operate under the parent company. Owners benefit from the parent company's reputation and advertising, as well as ongoing training that helps them start and grow their own franchise locations.
What is franchise agreement?
An individual or company enters into a franchise agreement to run a local business under a parent company's larger brand. The parent company gives permission to a local owner to use its name and products.
Why are franchise owners not responsible for advertising?
Franchise owners aren't responsible for all of the business advertising because most national franchises are well-established and invest in national advertising campaigns that make it easier for new owners to compete.
How does a parent company profit from franchises?
The parent company profits by collecting franchise fees from the various locations, while also using its locations to promote its brand. By opening more franchise locations, the parent corporation expands and enjoys a larger share of profits.
What is required of a local party in a franchise agreement?
The local party may be required to meet certain standards that the parent company sets. It may also have to purchase products from the parent company. All of this depends on the terms in the franchise agreement.
Why is it important to be a franchise owner?
Being a franchise owner is desirable for many people who want to run a business but don't want to create a new company from scratch. Proper research is essential so that you know exactly what you're getting into.
How do corporations achieve growth?
Corporations achieve growth by acquiring capital and having successful sales, marketing, and product development strategies. A corporation that operates as a franchise seeks to grow using private investors and other companies that purchase franchise locations.
What are the different types of franchises?
Typically there are three types of franchises, 1.Product distribution franchise, 2.Business format franchise, and. 3.Management franchise. 1. Product Distribution Franchise. This is a franchise where the franchisee basically sells the product of the franchisor.
What is franchise management?
A franchise is a system where rather than setting up a new business, trademarks or trade names of an already existing venture is obtained from the owner by another party, generally in lieu of a onetime fee and stipulated royalty in the long term.
Why do franchisors need area managers?
Major franchisors need area manager for the management of their well spread franchise network. Each manager therefore oversees the operation of franchisees operating within a specific area. It is up to them to keep an eye on how the franchisees are performing, and if they are adhering to the company policies.
What is the role of the executive in franchising?
The Executive. The franchisor is helped in dispensation of his duty generally by a board of executives. They are in charge of the decision making that the franchisees are supposed to follow. The board commonly includes a chief executive officer, a chief financial officer, a board of directors and a President.
Who makes decisions in franchise agreements?
According to the size and other factors, there can be several managers, looking after aspects of advertising, promoting products, finance etc., though in most franchise agreements, the main decision making power remains with the executives of the franchisor body.
Who buys the right to use trade marks from a franchisor?
The Franchisee. The party that bought the right to use trade marks from the franchisor is the franchisee. He is the head of the unit or franchise, though he has to take advice, and in certain cases incorporate the business procedures put forward by the franchisor.
What is business structure?
Business Structure refers to the type of set up that an investor wants to put in before starting a business and it primary depends on the type of business set up, liability assumed and tax incentives.
How are business structures decided?
Business structures are decided based on the need that is put forward by the owner. Each structure has separate advantages and disadvantages which should be kept in mind before choosing. There is not a single best structure that an owner may choose.
Why is partnership more time consuming than sole proprietorship?
Partnership structure is more time consuming that Sole proprietorship because lots of legal works are involved and it is costly to set. There is an advantage to the partnership structure. No tax is charged at the partnership level, which means the business doesn’t pay any tax, so the profits are distributed to partners and they pay tax ...
What is the most important feature of a corporation?
The most important feature of a corporation is that the entity and owners are separate. This restricts the claim of creditors to the business itself. So the owner’s personal assets will not be at risk if the business fails. A corporation can issue shares, both common shares, and preferred shares.
What is a general partnership?
General Partnership structure there are several owners of the business and each owner is actively taking part in the business. All decision about growth, expansion, and sustainability is being taken collectively by all. So the liability of the business is also shared between all the partners.
What is a good organization?
Good care of employees should be taken. A good organization is known for its behavior towards employees. Adaptability is the key. A good business structure should be open to changes. It should be able to adapt to changing environments.
Why are corporations so expensive?
Corporations are really costly to set-up as they are listed in exchanges and require lots of legal works such as the formation of the board, selecting underwriters, and other set-ups. The disclosure requirement incorporation is too high, so the risk of idea leakage is immense.
What are the structures to consider when purchasing an existing franchise?
These include: operating as a sole trader, a partnership, a company, a two-tiered company structure or through a trust. This article considers the advantages and disadvantages of each franchise business structure.
What is franchising in business?
In the case of a franchise system, it is common for the franchisor to be the owner of the intellectual property of the business. They will then license this to your company for use in operating the franchise. This means that these more valuable assets would not be at risk if your company fails.
What is franchise trust?
Franchise Trust Structure. The final structure to consider operating your franchise through is a trust. There are two different types of trusts, discretionary (family) or unit trusts. With either trust type, there is a trustee that owns the assets of the business and operates the business on behalf of the trust.
Why do companies have two tiered companies?
Some businesses decide to set up a two-tiered company structure to protect the valuable assets of the business. This is usually done through a holding company and operating company relationship. The holding company owns the assets and intellectual property of the business and the subsidiary company is the operating company.
Why do trusts have to distribute profits?
The trust must distribute the profit/income of the trust to the beneficiaries each financial year to avoid paying the highest tax rate. This can be a problem if your business needs working capital or wants to attract investment.
What happens if you wind up a company?
If you needed to wind up the company, you could potentially lose all of the business’ assets. This is important to consider if you want to have these assets for future use.
Is a franchise a separate entity?
Setting up a proprietary limited company to operate a franchise will protect your personal assets, as a company is a separate legal entity. It is capable of owning its own assets and liabilities and entering into contracts on behalf of the franchise. It is a more straightforward structure to operate than a two-tiered company or trust.
Single Company
Two-Tiered Company
- Some businesses decide to set up a two-tiered company structure to protect the valuable assets of the business. This is usually done through a holding company and operating company relationship. The holding company owns the assets and intellectual property of the business and the subsidiary company is the operating company. This means that the subsidiary company is t…
Franchise Trust Structure
- The final structure to consider operating your franchise through is a trust. There are two different types of trusts, discretionary (family) or unit trusts. With either trust type, there is a trustee that owns the assets of the business and operates the business on behalf of the trust. A discretionary trust allows the trustee to choose how to distr...
Issues to Consider
- Now that you know the structures available to you, it is important to consider your particular circumstances and other requirements specific to the franchise you wish to purchase. For example, while there are benefits of operating a franchise through a company, franchisors often require franchisees to enter into a personal guarantee. This is to effectively get around the perso…
Key Takeaways
- Choosing the right business structure for your franchise can be complicated. You will need to consider the best option for your business and examine all the relevant circumstances. Popular business structures include: 1. single companies; 2. two-tiered companies; and 3. franchise trust structure. If you have any questions about choosing the right business structure for your franchi…
Single Company Structure
- There are a lot of benefits of setting up your new franchise as a propriety limited company. It will be a separate legal entity, capable of owning its own assets and liabilities. This way it can all be separated from you personally. This is also the easiest business structure to operate as there will be only one set of contracts and regulatory requirements. The main downsides happen to come …
Two-Tiered Company Structure
- This is another franchise business structure designed to help you protect your assets. It entails a relationship between an operating company and a holding company. This splits up the legal responsibilities and ownership of the assets for more protection. The holding company will have control and ownership of the assets, while the operating company...
Franchise Trust Structure
- For this type of franchise business structure, there are 2 options of trusts. Family (discretionary) trust or unit trust. The difference between these 2 types of trusts is how the assets are distributed. A family trust will allow the trustee to choose how it is distributed, while for a unit trust it is not a choice. It is dependent on the amount of units they own, and their share received will b…
Conclusion
- From the 3 franchise business structures, you will need to properly analyse what your intentions and long term plans are. Unsurprisingly, the more expensive it is to set up the more protection of your assets you will receive and the more complicated it will be to manage. If you need to discuss your situation specifically, speak to a legal professionalto see what is right for you.