Types of Franchise Arrangements: What you need to know

FAQs: February 17, 2020

What are the different types of franchise arrangements

Every year, more and more people choose to open a franchise business in Australia. If you’re keen to join the almost 80,000 franchised businesses in Australia, the first step is to decide which type of franchise arrangement suits you best. 

Not all franchises are created equal. But whether you’re a first-time business owner who’s passionate about seizing a franchise opportunity or an experienced business owner wanting to diversify, there’s a steep learning curve ahead. 

So before you do anything else, you need to identify which of the different types of franchise arrangements will best suit your strengths, skills and needs. Start by looking at the different franchise business models and arrangements in the market to help you pick the right one for you. 

Understanding the franchising relationship 

Regardless of the type of franchising model or arrangement, there are two important features that are common across all forms of franchising:

  • Consistency: a franchisor spends a huge amount of money and time on building and testing systems and processes that work. They then rely on each franchisee to consistently use those systems and processes to keep their customers’ experiences the same across all of the franchise stores.

  • Compliance: as part of the agreement they sign, franchisees are required to comply with the operating procedures that their franchisor sets. As a result, the system changes that a franchisee can make without the franchisor’s agreement may be limited. But, on the up-side, franchisees know the system works (as long as they continue to work the system, at least). 

The 4 types of franchise business models

What is franchising and how does it work

To help you understand the franchise business models available, let’s take a look at the four available in Australia.

  1. Manufacturer-Retailer: This model licenses independent business owners to use the name and trademark of an established business. Typically, the franchisee sells the franchisor’s product directly to the public. This model is common in the clothing industry. 
  2. Manufacturer-Wholesaler: In this model, the franchisee manufactures and distributes the franchisor’s product under license. You’ll commonly see this model in soft drink bottling arrangements.
  3. Wholesaler-Retailer: This model lets the retailer (franchisee) buy products from a franchisor wholesaler then offer them for sale. The franchise agreement usually stipulates that franchisees have to buy from that wholesaling company. This is commonly seen in car parts stores. 
  4. Retailer-Retailer: In this model, a franchisor markets its products or services through a network of franchisees. As part of the deal, each franchisee pays a licence fee and must use the franchisor’s brand name and their standard systems and processes. This model is common in the Quick Service Restaurant (QSR) industry. 

The 4 types of franchise arrangements

Additionally, each of the models can be available in one or more of the following arrangements:

 

  • Single unit: If you’re a new entrepreneur looking to get your feet wet, this would be the simplest way to start your franchising journey. It’s the most common type of franchise, which gives you the rights to open and operate one franchise unit.
  • Multi-unit: Multi-unit arrangements allow high-performing franchisees the ability to operate multiple units to grow their small business.  
  • Area developer: This type of franchising arrangement typically allows you to operate a greater number of units over a larger territorial area. The benefit is that it restricts other franchisees from opening any units in your territory during the contract term.
  • Master franchise: A master franchise agreement offers you a great path to building wealth and a residual income source. It gives you more rights than an area development agreement would, and allows you to sell franchises to other people (sub-franchisees) within your territory. 

Oporto: a great example of the Retailer-Retailer franchise model

Like most other QSRs, Oporto uses the Retailer-Retailer model. This means that as a franchisee, you can operate your own business using our Oporto brand, but that you must do so following the guidelines we set down. 

It also means that you’re required to offer the same products at the same price and quality as in any other Oporto franchise. And you achieve this quality standard by following the same best-practice systems and processes that we’ve developed for use across all of our franchises.

The strength of the Retailer-Retailer type of franchise model is that you benefit from the scale of our business. In short, you get more bang for your buck. 

Our Oporto Franchising Team also:

  • helps you to negotiate better supplier rates through bulk buying
  • negotiates your lease to help get your franchise business started
  • offers you our marketing and technical support
  • trains you up in everything you need to know through combined classroom learning and hands-on work in stores alongside another experienced franchisee. 

The Retailer-Retailer arrangement ensures that our customers have a consistent experience across all of our stores. This strengthens our overall brand image and promotes all franchise stores across Australia – including yours. 

The 3 types of royalty models

As part of the franchise model, you as a franchisee are responsible for paying an ongoing licence fee (or royalty fee) to the franchisor. This allows you to use their intellectual property, among other things. 

You’ll usually need to pay this fee monthly or quarterly, and it can be calculated in a few different ways. Let’s take a quick look at the three most common royalty models.

 

  • The Fixed Dollar Amount: This is the most straightforward of all the franchise royalty models. It means you simply pay a specific amount of money on a regular basis (eg. $150 per week) to the franchisor. This stays the same, regardless of whether your franchise business’s performance is going great guns or not.
  • The Fixed Transaction Amount: In this more complex model, you regularly need to pay a dollar value that’s equivalent to a predetermined number of sales transactions. For example, the franchisor may determine that your royalty payment will be the equivalent value of ten standard product sales, which you need to pay weekly, fortnightly or monthly.
  • The Fixed Percentage Method: This model is one of the most common, as it’s easy to grasp and good for both you and the franchisor. The royalty amount you need to pay is based on a set percentage of your franchise’s gross sales.

    This means it aligns with the income from your sales performance, so it gives your franchisor an incentive to help you increase your sales. This win-win result doesn’t happen with either the Fixed Transaction or Fixed Dollar Amount royalty methods and is exactly why we use this model with our Oporto franchisees.

 

Oporto: the right franchise arrangement for you

Buying a franchise fulfils your dream of being your own boss, while still letting you draw on the support of an experienced team. However, you need to make sure that the franchise model and arrangement you choose is right for your individual circumstances.

Interested in knowing more about buying an Oporto franchise? 

Get in touch with our Franchising Team today!