Franchise businesses have become a popular and effective model for expanding operations across various industries worldwide. This business model allows franchisors to leverage their brand and expertise while enabling franchises to operate under an established system with reduced risks. By understanding the nature, classifications, and intricacies of franchising, both franchisors and franchises can maximize their potential for success. The following explanation delves into the concept of franchise businesses, their types, classifications, and the associated benefits and challenges.
1. What is Franchise Business?
1.1. Definition of Franchise Business
The term “Franchise” originates from the French word “Franc,” which means “free.” According to the English-Vietnamese Dictionary of the Institute of Linguistics, “Franchise” or “Franchising” is understood as business franchising. It refers to a business model that allows individuals or organizations to officially sell goods or services of a company or enterprise in a specific area.
In Vietnamese, Franchise Business is commonly referred to as “nhượng quyền kinh doanh” or “nhượng quyền thương hiệu.”
The party granting the franchise is the “franchisor”, while the party receiving the franchise is called the “franchisee.” Typically, the franchisee is responsible for infrastructure and human resource investments, while the franchisor provides the business model, branding, and promotional support.
The franchisor must ensure accurate and sufficient support to the franchisee. Conversely, the franchisee is obligated to strictly follow the franchisor’s business model, operational methods, and processes.
1.2. Types of Franchise Models
There are four main types of franchise models currently in practice:
- Management Franchise (Franchise with Management Involvement): This model goes beyond transferring ownership of the brand and business model. The franchisor also supports the franchisee by providing qualified and professional managers to oversee and operate the business.
- Full Business Format Franchise (Comprehensive Business Model Franchise): In this model, the franchisor transfers at least four fundamental components:
- System: Includes standardized strategies, models, operating processes, management policies, and operational manuals.
- Production and business technology know-how.
- Brand system.
- Products and services.
The franchisee is required to pay two basic fees: the up-front fee (initial franchise fee) and the royalty fee (usually calculated as a percentage of periodic sales).
- Equity Franchise (Franchise with Capital Investment): In this type, the franchisor participates in a small percentage of the investment capital in the form of a joint venture to directly oversee the system. The franchisor may even join the Board of Directors of the franchisee company, despite holding a minor equity stake.
- Non-Business Format Franchise (Non-Comprehensive Franchise): This model involves a more loosely managed structure and includes the following common scenarios:
- Product distribution franchise (e.g., distribution of specific goods or services).
- Marketing franchise (e.g., franchising production formulas and marketing strategies).
- Brand franchise (or trademark licensing).
2. Classification of Four Franchise Types
Franchise businesses are typically categorized into four main types based on the following criteria:
2.1. Classification by Model Integrity
There are two main franchise types based on the integrity of the model:
- Traditional Franchising: Focuses on brand licensing or product distribution. The relationship between franchisor and franchisee is typically governed by a distribution or agency agreement, allowing the franchisee to distribute products and use the brand within a specific geographical area. Example: distributors of brands like Pepsi or Coca-Cola.
- Modern Franchising (Business Model Franchising): Involves providing the franchisee with a complete business model, including a trade name license, product/service offerings, operational methods, marketing strategies, quality control processes, and essential business services. Example: fast-food chains like McDonald’s and KFC.
2.2. Classification by Contract Type
The following are the primary contract types:
- Single Unit Franchise: The franchisee is authorized to open and operate a single franchise unit. For instance, if an individual has limited resources and opens just one store under a franchise agreement, this is considered single-unit franchising.
- Multiple Unit Franchise: The franchisee is allowed to open and manage multiple franchise units. This can be further divided into:
- Master Franchise: Grants the franchisee the right to open multiple units within a specific territory and sub-franchise to third parties. The master franchisee is often responsible for initial training, support, and collecting a percentage of franchise fees and royalties.
- Area Development Franchise: Allows the franchisee to exclusively develop multiple units within a designated territory without sub-franchising rights.
2.3. Classification by Territorial Scope
This criterion categorizes franchises based on geographical coverage:
- Domestic franchises (e.g., Milano Coffee, Trung Nguyên Legend, E-coffee).
- International franchises entering Vietnam (e.g., Gongcha, Dingtea, McDonald’s).
- Vietnamese franchises expanding abroad (e.g., Phở 24, Highland Coffee).
2.4. Other Classification Criteria
- By Investment Participation:
- Franchise without capital investment: The franchisor does not contribute capital.
- Franchise with capital investment: The franchisor contributes capital, often equivalent to the upfront franchise fee.
- By Management Involvement:
- With operational management involvement: Common in international hotel franchises.
- Without operational management involvement.
3. Benefits and Challenges of Franchising
3.1. Benefits of Franchising
For Franchisors:
- Cost savings in sales, market research, and workforce expenses.
- Rapid business expansion with lower costs since franchisees bear the operational costs.
- Additional revenue streams from franchise fees and royalties, providing stable and lower-risk income.
- Increased brand recognition and popularity among customers.
For Franchisees:
- Leveraging brand advantages like customer base and established production processes.
- Receiving support and advice from the franchisor.
- Reduced risks and greater chances of success, especially for startups or investors with limited capital.
3.2. Challenges of Franchising
For Franchisors:
- Potential loss of control over franchise units due to weak management.
- Brand reputation may suffer if franchisees perform poorly or face difficulties.
For Franchisees:
- Adherence to the franchisor’s guidelines and framework may limit creativity and new business ideas.
- Sharing risks with the franchisor during times of crisis.
- Intense competition within the franchisor’s system, as franchisees must compete not only with external competitors but also with other franchise units.
In conclusion, franchising is a dynamic business model that offers significant opportunities for growth and success to both franchisors and franchisees. While it provides numerous benefits, such as brand expansion, cost savings, and risk reduction, it also comes with challenges that require careful management and adherence to established frameworks. By selecting the right type of franchise model and maintaining a strong partnership, both parties can achieve sustainable growth and profitability in a competitive market. Understanding the nuances of franchising is essential for anyone looking to thrive in this ever-evolving business landscape.
📞 CONTACT LEGAL CONSULTANT:
TLA Law is a leading law firm with a team of highly experienced lawyers specializing in criminal, civil, corporate, marriage and family law, and more. We are committed to providing comprehensive legal support and answering all your legal questions. If you have any further questions, please do not hesitate to contact us.
1. Lawyer Vu Thi Phuong Thanh, Manager of TLA Law LLC, Ha Noi Bar Association
Email: vtpthanh@tlalaw.vn
2. Lawyer Tran My Le, Chairman of the Members’ Council, Ha Noi Bar Association
Email: tmle@tlalaw.vn.
Dinh Phuong Thao