The 5 Types Of Franchises You Could Own
Thinking of starting a franchise but don't know which type is the best fit? Start here with our full guide to the five types of franchise operations you may want to own.
A franchise is a marketing concept and business model that expands a business. Franchising allows small business owners to own their piece of an established operation by entering a contractual relationship with the licensor/franchisor. Franchising gives small business owners an opportunity to own their piece of an established operation.
Franchises are at work on the shelves of mom-and-pop businesses, in vending machines, in the food and drinks we consume, and even in our cars and clothes. We interact with franchises all the time in our everyday lives.
If you have the capital, expertise, and dedication, you can also own one of the five types of franchises and leverage a brand name to your advantage.
Table of Contents
What Are The Different Types Of Franchises?
Here are five different types of franchises:
- Business Format Franchises: The most common type of franchise. The franchisee not only sells a certain product but also produces and delivers the product or service in accordance with the franchisor’s proprietary ingredients and/or practices with the franchisor’s assistance.
- Distribution Franchises: The franchisee buys the right to create and/or sell a branded product, or part of a product, as per the franchisor’s practices and standards. Distribution franchises have two common subtypes: manufacturing franchises and product franchises.
- Job Franchises: In job franchises, franchisees run and maintain the franchise. They tend to be service-based and, as such, usually don’t require opening a physical storefront.
- Conversion Franchises: This is when an independent business converts into a franchise. It adheres to franchisor policies and receives assistance from the parent company for marketing, ongoing operations, and employee training.
- Investment Franchises: Typically the most expensive kind of franchise. Investors put large sums of capital towards franchised businesses and enlist professionals, such as managers and team leaders, to oversee the
Business Format Franchises
- Built-in base of customers who already love the product
- Security of a proven business model
- Corporate guidance, training, and marketing
- Moderate level of autonomy
- Franchise fees can be expensive
- The profit margin is narrow
A business format franchise is the most common type of franchise.
A business format franchise produces and delivers not only a product or service but also a customer experience, all in accordance with the franchisor’s specific standards. In exchange for a one-time franchise fee and ongoing royalty fees, the franchisee also receives assistance from the franchisor in terms of training, marketing, quality control systems, and other aspects of running the business.
Business format franchises dominate many industries, from fast food to retail and hospitality, along with many others. Popular examples include McDonald’s, H&R Block, Starbucks, Hilton Hotels, and Kumon Math and Reading Centers.
Usually, it’s not obvious to the consumer whether a chain establishment is company-owned or franchised because the consumer experience varies minimally (if at all) from one location to the next, nor does it vary significantly depending on whether you’re at a company-owned vs. franchised establishment.
For example, the fast-casual eatery Smashburger has some corporate-owned locations and some franchise-owned locations, but they all operate pretty much the same.
Business format franchises vary significantly in how much they cost to open and operate. It may be possible to open a home-based franchise, such as a travel agent franchise, for just a few thousand dollars; at the other end of the spectrum, opening a popular restaurant franchise can set you back several million dollars.
Business format franchisees become franchise owners either by developing a new franchise location from scratch or sometimes by purchasing an existing franchise location. Some franchisors require prospective franchisees to agree to develop multiple franchise locations within a certain timeframe.
Is A Business Format Franchise Right For You?
The ideal candidate for a business format franchise has the following characteristics:
- You don’t necessarily have any specific skillset but want to own and operate your own business
- You have the capital necessary to pay the franchise fee and other startup costs
- You don’t mind following corporate practices/instructions to a tee
- You are willing to forfeit part of your profit in exchange for corporate guidance and the safety of a proven business model
At the general level, distribution franchises are more heavily involved with the production side of consumer goods.
Franchisors sell the rights to franchisees to create and/or sell their products per their standards and regulations, such as automotive manufacturers (Hyundai) and beverage manufacturers (Coca-Cola). However, not all franchise agreements grant unilateral access to manufacture, distribute, and sell a branded product simultaneously. During the manufacturing stage, the product is typically further assembled and/or distributed to consumers and retailers via downstream channels.
Depending on the degree of control a franchisee has over the lifecycle of the branded product from assembly to shelves, a distribution franchise can be a manufacturing franchise, a product franchise, or sometimes both.
Manufacturing Franchises Vs. Product Franchises
While manufacturing and product franchises are both under the “distribution franchises” umbrella, they are a bit different in how they operate. Here are the major differences between the two.
- Potentially lucrative
- After matching product specifications, business has autonomy
- No need to worry about sales, marketing, or any other customer-facing aspects
- Startup and overhead costs are substantial
- Fluctuations in raw material and energy costs can cut into your profit margin.
- Many strict codes and specifications
A manufacturing franchise is a manufacturing company that produces the raw or finished product that a franchisor ultimately sells. Sometimes, these operations are also called “suppliers” or “partners.”
They are often located in countries outside the U.S. where production costs are cheaper. Some examples include automobile and automotive parts, computer, clothing, and food and beverage manufacturers. Not all consumer products use manufacturing franchises; company-owned facilities manufacture some trademarked products.
Coca-Cola, for example, partners with manufacturing franchises to manufacture the syrup that goes into their soft drinks. The syrup is then sold to a bottling company that adds water, carbonation, bottles, and distributes the drinks.
Manufacturing franchises must pay the franchisor a fee for the license to produce the raw materials or finished product with the company’s trademarked name. The product must be manufactured within strict specifications to meet the franchisor’s quality standards and is indistinguishable from the products produced by the company’s other manufacturers.
These are significant operations and require not only owning the means to production but also experience, expertise, and a lot of legal help to ensure that all relevant laws and policies are being adhered to.
Is A Manufacturing Franchise Right For You?
You might consider a manufacturing franchise if you fit the following profile:
- You already own manufacturing facilities or have the capital to obtain or build them.
- You have experience mass-producing products for other franchisors or can partner with someone who has this experience.
- Your operations meet or can meet all of a franchisor’s supplier requirements.
- Benefit from the reputation of a name-brand product
- Few upfront costs apart from purchasing wholesale products
- Business autonomy
- Might get stuck with a surplus
- No or minimal support/assistance from the franchisor
- Need own storefront
In contrast, with a product franchise — sometimes called a “product distributor” franchise — the franchisee buys the rights to sell a certain product at their own establishment in exchange for paying the franchisor a royalty fee and/or with certain limitations.
The limitation may be that the store must sell the franchisors’ products exclusively (but this is not always the case). Common examples include gas stations (Exxon), vending machines (Coca-Cola), and car dealerships (Ford Motor Company). Depending on the agreement, the franchisee may or may not have to pay fees to the franchisor to buy the license to sell the trademarked product.
With a product franchise, the product itself is the only aspect of the business distributed per the franchisor’s terms. The consumer experience can vary a lot from one business to the next, as the distributor (franchisee) maintains control over most aspects of their business, and the franchisor does not offer any assistance in terms of sales processes, employee training, etc.
Is A Product Franchise Right For You?
You could be the ideal candidate for a product franchise if you have the following attributes:
- You already own your own sales channel (usually a storefront establishment but could also include eCommerce) or can access the capital to do so.
- Your customers ask for a certain (franchised) product, or you have reason to believe your customers would buy said product.
- You want to maintain control of your own business without having to deal with franchisor oversight.
- Minimal investment required
- Access to an established market
- Franchisor earns royalties off of the services you provide
- Your creativity and flexibility will be limited
- You’re responsible for managing the daily operations of the franchised business
Job franchises almost always center around a professional service.
Franchisees will pay to use the franchise’s name; in doing so, they can tap into the franchise’s already-established reputation and customer base. Be aware that this isn’t a hands-off franchise opportunity — you will be expected to perform much of the work involved. Examples include Rooter-Man, ServPro, and Merry Maids.
Beyond that, starting a job franchise is relatively inexpensive compared to the other options.
They’re ideal for sole business owners and don’t require a workforce beyond a few employees, though sometimes even employees aren’t necessary. Franchisors typically provide training to bring you up to speed on their expectations and best practices.
Is A Job Franchise Right For You?
A job franchise may be a good choice for you if:
- Your business expertise is geared towards providing professional services.
- You’re an independent solopreneur and have the availability to commit to the work the franchise requires.
- You’re interested in the possibility of running a business from home.
- May expand your market
- The franchisor will assist with the conversion and promotions
- Less costly and time-consuming
- Fees will hurt your bottom-line
- Give up business autonomy
- Might need considerable cash to upgrade
A conversion franchise is a hybrid model of the types described. This is when a currently-running business buys the rights to operate under the name and brand of a franchise.
Numerous businesses can choose to convert into a franchise should they be able to meet the franchisor’s standards.
If you’re considering a conversion franchise, discuss the details and approval process with the franchisor. Even if you have a property that seems like an ideal location to convert, the franchisor may insist on choosing or simply building their own. (Some franchisors, such as McDonald’s, give you the option to sell them your property, but that still doesn’t guarantee that it will be used — or that you will be assigned to it.)
Is A Conversion Franchise Right For You?
A conversion franchise may be right for you if you want to experiment with potential paths to success. Consider this option if:
- You want to take on the name and reputation of a business with an established track record and ample means.
- You can afford the time and financial costs involved with the conversion.
- You’re prepared and able to follow the franchisor’s branding and policy requirements, including investments into possible upgrades and renovations.
- Possible to make high returns
- Diversify your earnings and expand into new investment opportunities
- A hands-off approach
- Must already have a lot of access to cash/capital.
- All investments come with a risk
Investment franchises usually demand the least amount of labor.
Franchisees treat these businesses purely as investments (hence the name), allowing their workforce and managers to do the heavy lifting for them. Large-scale businesses — such as hotels, restaurants, and grocery chains — are usually chosen by franchisees for their ability to generate income on a higher scale.
However, they’re notoriously expensive to start up, so this likely won’t be an option unless you already have enough capital to spare and a team of professionals to oversee the business’s operations.
Is An Investment Franchise Right For You?
Here are a few qualifications that can help you determine if this is an option worth considering:
- You have enough resources to risk on a new investment.
- You have a reliable network of professionals you can trust with the success of the business.
- You’re interested in diversifying your portfolio and have extensive experience in the commercial industry.
Choosing The Best Kind Of Franchise For You
Five main franchising relationship types represent a different segment of a franchised company’s supply chain.
Depending on factors such as the level of control you want over your business, your business experience/skillset, and the amount of capital you can access, you might decide to open any of the franchises above.
Or, you might decide to go into business for yourself!
For more information on franchise ownership, check out some more franchise resources we’ve put together for you: