If you have been researching different franchise opportunities online, you may have come across references to the term, “business format” franchise. You might even be – in fact, you probably are – considering a business format franchise opportunity. So, what exactly does this mean?
Business Format Franchising 101
Most franchise opportunities today are what are known as, “business format” franchises. When you put all of the pieces together, this is ultimately a lot like it sounds. With a standard business format franchise, franchisees receive:
- A License to Use the Franchisor’s Principal Trademark – A license to use the franchisor’s principal trademark is a key component of the business format franchise. As a business format franchisee, you operate under the franchisor’s principal trademark—which is typically the name, or “brand,” you use to identify your business. Subway, Motel 6, RE/MAX, UPS Store – these are all examples of business format franchises.
- Access to the Franchisor’s System and Standards – As a business format franchisee, you also receive the right (and obligation) to use the franchisor’s system and standards to operate your business. This typically includes initial training, standard buildout plans, access to an “operations manual,” some level of ongoing support, and instructions for use of point-of-sale (POS) systems and key functionalities.
- The Right (and Obligation) to Sell the Franchisor’s Products or Services – The third major aspect of a business format franchise is the right to sell the franchisor’s products or services. This may include branded items, food recipes, suites of services, or a specific method for performing a particular type of service (like daycare or blinds installation).
Importantly, business format franchisees typically have an obligation to sell some (or all) of the franchisor’s products or services, and they are frequently restricted from selling “unapproved” items as well. As a result, prospective franchisees must perform their due diligence and develop a level of confidence that they will be able to succeed under the franchisor’s business format.
What is the Alternative?
If this sounds like every franchise opportunity you have considered, you are probably right. Unless you are considering opportunities in certain, specific industries, the business format franchise generally reigns supreme.
The primary alternative to a business format franchise is what is now known as a traditional product distribution franchise. In product distribution franchises, franchisees (often referred to as “dealers” or “distributors”) receive the right to sell the franchisor’s products under the franchisor’s name, but do not receive the “business format” system and support discussed above. These types of franchises exist in the gasoline and automobile industries and a few others, but are now far less common than the business format model.
Are You Considering a Business Format Franchise?
If you are considering a business format franchise opportunity, it is critical to hire an experienced franchise attorney to review your Franchise Disclosure Document (FDD) and franchise agreement. At the Goldstein Law Firm, we offer flat-fee franchise reviews, and attorney Jeffrey M. Goldstein has over 30 years of experience representing new and existing franchisees. To inquire about our services, please contact us online or call (202) 293-3947 today.
