What is a franchise and what isn’t?

Franchising can be confusing, with many different models and terms that sound similar but operate differently. To help you out, we’ve split key concepts into those that are franchising and those that aren’t, featuring insights from industry experts.

What counts as a franchise?

True franchising involves a proven system and ongoing support from the franchisor. It allows franchisees to operate a business under a consistent model with training and guidance.

Business format franchise

A business format franchise provides a complete system for operating a business. Brian Duckett, former chairman of The Franchising Centre, explains: “Business format franchising starts with somebody allowing someone else to sell things in a particular place and allowing them to use a particular name.

“It is prescriptive as to how that selling should be done, and how the product or service should be delivered. The purpose is to build a network operating to equally high standards in order to build a brand.”

Franchisors are closely involved in training and monitoring franchisees to ensure the business operates successfully and consistently.

Job franchise

A job franchise is a hands-on business where the franchisee delivers the service or product themselves. As Shelley Nadler, legal director at Bird & Bird, describes, “it usually takes the form of a trade supplying, selling or delivering products or services. It may be mobile, home-based or requiring small office premises.”

Investment franchise

An investment franchise involves significant capital investment but often minimal direct work from the franchisee.

Shelley Nadler explains it as “where a franchisee invests a significant amount of money in a franchise such as a hotel. The franchisee will often not work in the franchise at all but will employ a professional management team to run the business.”

Multi-level franchise

Multi-level franchising occurs when a franchisor allows a master franchisee to recruit and manage their own sub-franchisees.

Brian Duckett explains: “The sub-franchisees pay fees to the master franchisee, who in turn pays a percentage of their income back to the franchisor.”

However, he also warns: “Regrettably, this is often done to increase the number and amount of upfront fees available and to save the franchisor the bother and expense of recruiting and paying trained support staff.

“I’d say the jury is still out as to whether it is appropriate (or necessary) in a geographically small country such as the UK.”

What isn’t franchising?

Some business arrangements are often mistaken for franchises but lack the full structure and ongoing support that define franchising.

Business opportunity

The term “business opportunity” is broad and less precise than “franchise”. John Pratt, senior partner at Hamilton Pratt, notes: “The big difference between a ‘franchise’ and a ‘business opportunity’ is that the former has been pilot tested, so that the franchisor is in a position to prove the system has been tested in the field.

“‘Business opportunities’, on the other hand, are precisely that. In other words, they are an opportunity, but not a system that has been proven.”

Distributorship

A distributorship involves a manufacturer or supplier appointing a third party to sell its products. Unlike a franchise, there is typically little ongoing support or prescribed method of operation. Distributors often have flexibility to sell products from multiple suppliers and set their own business methods.

Product/trade name franchise

A product or trade name franchise is slightly more structured than a distributorship, but it still differs from a full franchise system.

Nadler clarifies: “In a product/trade name franchise, the franchisee will be a distributor of the product.

“You might sell either competing or complementary products. It is unlikely that you’ll sell only one supplier’s products. You’ll sell whatever you distribute under your own name, although you may have signs bearing products’ trademarks.

“Essentially you sell products in your own way using your own business systems and methods. You need no special training beyond becoming familiar with the product range, its capabilities and any follow-up services that may be appropriate. You will not pay fees.”

Conclusion

Franchising comes in many shapes and sizes, and understanding the differences is crucial before making any investment. True franchise opportunities offer tested systems, ongoing support and a blueprint for success.

Other kinds of business opportunities may offer flexibility but lack the structure and guidance that define a franchise.