Types of Franchises: The 5 Different Types of Franchises
If you’re considering becoming a business owner, don’t overlook the benefits of franchise opportunities. Franchising is a business model where a franchisor grants others the right to operate a business under their brand. In a franchise system, franchisees pay fees to be backed by a reputable brand name and parent company, but it often comes with success. According to the International Franchise Association, there are over 806,000 franchise establishments in the United States, employing nearly 8.7 million people and contributing $858.5 billion to the economy. There are five different models across industries, each varying in the level of support and involvement from the franchisor.
Types of Franchises
1. Business Format Franchising
Of all the franchising types, business format franchising tends to be the most popular because it is the type that most consumers are familiar with—like fast-food and fitness centers.
A business format franchising arrangement allows a franchisee to run their business under its brand name and business model. The franchisor provides a detailed business operation plan that includes their procedures and provides initial and ongoing training to the franchisee. Examples include fast-food restaurants like McDonald’s and Chick-fil-A, casual dining restaurants like Chili’s and Buffalo Wild Wings, and fitness centers like Planet Fitness and F45 Training.
2. Product Franchising
Also called distribution franchising, product franchising involves opening a franchise to sell and distribute products by the brand company. In some cases, brand-related services are also included. The franchisor licenses the use of their branded trademark, but not their methods for running a business. Examples include car manufacturers and servicers, large equipment manufacturers, computer manufacturers, home appliance manufacturers, bicycle makers, and vending machine manufacturers.
3. Job Franchising
Job franchising involves opening and running a low-investment franchise option that can be home-based or run out of a commercially leased space. The franchisee can be the lone operator or hire a handful of employees — typically up to five. They usually pay a franchise fee and initial startup costs for equipment and basic materials. Examples include cell phone repair services, cleaning services, event planning services, plumbing services, pool cleaning and maintenance services, residential lawn care services, and travel agency services.
4. Investment Franchising
Investment franchising involves putting money into a large-scale business that requires a large amount of capital. The franchisee is a major investor who provides the money and the management team needed to run the business, primarily to turn a profit with limited personal involvement. Examples include hotel chains like Comfort Inn and Holiday Inn Express and large restaurants, like Planet Hollywood and Hard Rock Café.
5. Conversion Franchising
Conversion franchising is a hybrid method where an existing franchise converts an independent business into a new franchise, adopting the franchisor's trademarks, advertising, marketing, and business model. This method helps franchisors grow more rapidly and is most popular among home service industries that employ electricians, florists, HVAC servicers, plumbers, professional service providers, and real-estate brokers.
Evaluating Franchise Types
To align a franchise type with small business goals, entrepreneurs should carefully examine which franchise model works for their own business. They should consider market preferences, investment capabilities, and desired scalability.
- A business format franchise provides entrepreneurs with an established brand and comprehensive support, including training and proven operational systems. This model offers potential for multi-unit ownership, but requires higher initial investment and limited autonomy due to franchisor guidelines.
- In a product franchise, franchisees benefit from existing market demand and support for product supply and marketing; however, they have limited control over product offerings and pricing, relying heavily on the franchisor.
- A manufacturing franchise grants ownership over production processes and scalability, but requires a large-scale capital investment and ongoing support for raw materials and supply chain management.
- Conversion franchising allows existing businesses to join a recognized brand, but involves costs to meet franchisor standards and may disrupt existing customer relationships.
- Job-based franchises offer low-cost entry and flexibility, but rely heavily on franchisor support and face challenges in scaling beyond local markets.
Exit strategies and valuation methods vary across different franchise models. Successful exit plans rely on accurate valuation assessments and strategic planning to maximize returns for franchise owners and often involve selling the established business to another individual, distributor, or transferring ownership back to the franchisor.
Revenue and discounted cash flow (DCF) analysis are used to value franchises, considering factors like brand strength and growth potential. In product franchises, valuation may reflect product sales, market demand, and exclusivity. Manufacturing franchisees see valuation driven by asset-based methods and revenue projections. Job-based franchisees may be valued based on service revenue, customer contracts, and market potential.
Types of Franchise Arrangements
Franchising offers various arrangements that cater to different strategies. Understanding these franchise types can help entrepreneurs choose the right opportunity to align with their goals and resources.
- Single Unit Franchise: This is the most common type, where a franchisee operates a single unit of the franchise within a designated territory. It's suitable for individuals seeking a hands-on approach and lower initial investment.
- Multi-Unit Franchise: Multi-unit franchising involves owning and operating multiple units of the same franchise within a specific area or across different locations. This strategy allows for economies of scale and accelerated growth.
- Area Development Franchise: Area development grants a franchisee the right to open multiple units within a defined geographic area over a specified period. It offers exclusivity in the designated territory and requires a larger investment, but has significant growth potential.
- Master Franchise: A master franchisee acts as a sub-franchisor, essentially owning the rights to sell franchises within a specific region. They recruit and support individual franchisees, earning royalties from their operations.
- Conversion Franchise: This arrangement allows existing businesses to convert into a franchise model under an established brand. It's ideal for entrepreneurs looking to leverage their current business into a franchise.
- Captive Market Franchise: Captive market franchises operate within specific locations, such as airports, universities, or military bases, targeting a captive audience with limited competition.
- Non-Traditional Franchise: Non-traditional franchises operate in unconventional locations like kiosks, mobile units, or shared spaces, offering flexibility and lower overhead costs.
Choosing the right franchise type and arrangement is crucial for entrepreneurs considering franchise ownership. By understanding the differences between the various models and evaluating their goals and resources, prospective franchisees can make informed decisions that align with their business objectives. Visit BizBuySell’s Franchise Directory to find a wide range of opportunities and find the perfect fit for your entrepreneurial journey.