A franchise business, simply, involves an owner of a product or service who licenses some aspects of the business to a third party for their use. The owner, also known as the franchisor, grants the license to the third party, also known as the franchisee.
There are several types of franchise business that can be classified on the basis of investment level, strategy, operations, marketing and relationship models. So, if you wish to open a new franchise, you should know beforehand which industry would you like to be involved in, the level of commitment you are ready to offer and time you have available to invest in the business.
In this blog, we will read about the Major Types of Franchise Business Models in the United States and how they work.
Types of Franchise Business
Here is a list of different types of franchise models, a business can adopt. Let’s have a look.
Typically, a home-based or low investment franchise initiated by a person who wishes to run a small franchise business alone or with a small staff of less than 5 people. The Franchisee usually needs to only purchase limited equipment, minimal stock and maybe a vehicle. A large number of industries can be franchised in this model, mostly providing services.
Few examples of Job Franchise business are:
- Children Services
- Pool Maintenance
- Lawn Care
- Travel Agency
- Cell Phone repairs
- Cleaning Services
- Event Planning
- Real Estate
- Coffee Van
Business Format Franchise
Something that is different about this business model is that here the franchisee is allowed to use the franchisor’s trademark and gets access to operate and market the business products and services. With a detailed plan including all aspects of the business, it provides an initial and ongoing training and support to the franchisee.
Business Format Franchise Business is the most common type in the category and following are some examples under this model:
- Fast Food Chain (McDonalds, Subway)
- Restaurants (Golden Corral, Olive Garden)
- Retail (Bath & Body Works, Zara)
- Fitness (Gold’s Gym, Anytime Fitness)
Product/ Distribution Franchise
Product Franchise Business model depends on the supplier-dealer relationship, where the franchisee distributes the products of the franchisor. The franchisor licenses his trademark, but does not provide full access to the franchisee for running the business. They mainly deal with large products, but sometimes the franchisor not only licenses the distribution, but also a part of the manufacturing process.
Some examples of Product Franchise Business are:
- Car & Repair Parts (Ford, Exxon)
- Computers (HP, Dell)
- Appliances (LG, Philips)
- Large Equipment (Caterpillar)
- Beverages (Coca-Cola, Pepsi)
- Vending Machines
Such type of franchise model works for large scale projects such as hotels and large restaurants, mainly because they require large investment to run. In this franchise business, the franchisees invest in the business with their own money and management team, or engages the franchisor to operate the business while producing capital gain on exit or return on investment.
Some examples of Investment Franchise Business are:
- Hotels (Holiday Inn, Park Inn)
- Large Restaurants (Dickey’s Barbeque, Darden, Yum China)
Conversion franchise business is a modification of standard franchise relationships. This involves growing continually by converting independent businesses in the same industry into franchise units. While the franchisees adopt the trademarks, marketing and advertising, training and client servicing programs, they are also popular for increasing procurement savings.
With rapid growth and royalty potential in terms of units and income, the conversion franchise model is a hit in the industry. While the franchisee is not beginning the new business from scratch, it is easier for existing companies to rise quickly. The basic business and even the clientele doesn’t change as much. People using this business model benefit by gaining from the popularity, support systems and success of the brand.
Here are some examples of this popular type of franchise business:
- Real-Estate Brokers
- Air-Conditioning services
- Professional Services Companies
Management franchise business focuses on managing the business. While the manager does not need to be a part of the day-to-day running of the business, it is ideal for someone with previous managing experience allowing individuals with transferable skills to take the ownership of the franchise and operate it to success.
It is suitable for people with skills such as entrepreneurial flair and should be capable of paying fees for the ability to use the trademark while focusing on business development and managing the team. It is perfect for resale franchises that are bought from existing franchisee. You might have to implement serious changes in order to correct the functioning and improve the performance of the existing franchise business.
Some examples of Management Franchise Business are:
- Parcel Delivery
- Fast Food Chains (KFC, Dominoes)
- UPS Store
- American Idol
Considerations of Franchisor
- Developing a Franchise Plan
- Conduct Market Research
- Get Familiar with local laws and regulations
- Providing training to franchisees
- Motivating the franchisees
- Creating a criterion for franchisee selection
- Management of franchisees
- Supply Chain functioning of products/materials
- Obtain Intellectual Property Rights such as trademark
Considerations of Franchisee
- Fulfilling demand and supply of products/services
- Increasing profitability of franchise
- Increasing time of investment recoup
- Keeping record of franchisor
- Supporting other franchisees
- Experience and Profitability of other franchisees
- Evaluating competition in market
- Detecting capital requirements
- Fulfilling franchisor demands such as income projections, completing deadlines
The above-mentioned types of franchise business models are only a part of the wide array of business arrangements possible in the market. Too many options can cause ambiguity and can become difficult to understand and choose and that is when you might require help of a professional such as a consulting service or a franchising attorney.
Hope now you understand the types of franchise business models better and this blog helps you in deciding which industry you might want to choose for your new business.