Franchise models, also known as business format franchising, are an excellent way to start a business with the added advantage of receiving significant support from an established company. In this business arrangement, one company, known as the franchisor, allows an individual or another company, known as the franchisee, to operate a branch under its established brand, utilizing its products, services, and operational systems. In exchange, the franchisee typically pays an initial franchise fee and ongoing royalty fees to the franchisor in return for continuous support.
While this basic arrangement remains consistent across most franchise systems, the reality is that there are considerable differences in how each franchise model operates. Each type comes with its own level of involvement, cost structure, and responsibilities, making it essential to narrow down your choices to find the franchise model that suits your goals and aspirations.
If you’re considering becoming a franchise owner, read on to understand more about the different types of franchise models and what you need to know to choose the best one for your entrepreneurial journey.
The Basics of Franchise Business Models
A franchise business model is essentially a system where the franchisor licenses its brand, operational methods, and services to a franchisee. This allows the franchisee to run a business under an established name. The franchisee benefits from operating within a proven business framework while retaining ownership of the individual location. At the same time, the franchisor expands its reach by leveraging the investment and local management expertise of the franchisee.
The relationship between the franchisee and the franchisor is governed by a franchise agreement, a legal contract that outlines the conditions that both parties must adhere to. This agreement typically includes several key components:
- Initial Fees and Ongoing Royalties:
The franchisee typically pays an upfront fee to join the franchise system, along with a continuing royalty fee, which is usually a percentage of revenue or sales. These fees contribute to the franchisor’s costs for providing ongoing support, training, and marketing. - Territorial Rights:
The agreement specifies whether the franchisee will have exclusive rights to operate in a specific geographic region or if the franchisor has the right to establish additional franchises within that area. - Brand Standards and Guidelines:
Franchisees must adhere to specific operational procedures set by the franchisor. This ensures that each franchise location maintains consistent standards in quality, service, and appearance. - Training and Support:
Franchisors often provide training programs and marketing support to help franchisees run their business efficiently and successfully. This may include ongoing operational support, advertising, and promotional resources. - Term of the Agreement:
Franchise agreements are typically for a set period, often between 5 to 20 years, with options for renewal at the end of the term, depending on the franchise’s performance and agreement terms.
How Does Franchising Differ in Small Business Models?
In a traditional business model, the owner has complete control over operations, branding, and decision-making. The owner is responsible for building the brand from scratch and bears all risks and responsibilities. In contrast, franchising allows the franchisee to operate under an already established brand and business model. This means the franchisee benefits from brand recognition and operational guidance but also has to follow the franchisor’s prescribed procedures.
While franchisees enjoy reduced risks and receive substantial operational support, they often give up some degree of autonomy when it comes to decision-making. The franchise system offers a structured approach, but it also requires franchisees to follow strict guidelines set by the franchisor. Therefore, the decision to choose a franchise should align with the franchisee’s preference for stability and guidance versus flexibility and independent decision-making.
Common Types of Franchise Models
For newcomers exploring franchise opportunities, it may seem like all franchise models fall under the same umbrella. However, there are different types of franchise systems, each catering to specific industries and offering different levels of control and commitment. Understanding the different types of franchise models will help you identify the right fit for your goals.
The four most common types of franchises are Product Distribution Franchises, Business Format Franchises, Manufacturing Franchises, and Investment Franchises.
- Product Distribution Franchises
These franchises focus on the distribution and sale of the franchisor’s products. This model often operates in a wholesale or retail environment. Examples include automobile dealerships, gas stations, and soft drink distributors. Franchisees in this category are responsible for getting the franchisor’s products into the hands of consumers, often with greater flexibility in their daily operations compared to other types of franchises.
- Business Format Franchises
In a business format franchise, the franchisee does not just sell the franchisor’s products or services; they also follow a comprehensive system that governs everything from branding and marketing to operations and customer service. Fast food chains like McDonald’s and Subway, as well as staffing agencies like Spherion, are excellent examples of this type. Franchisees must strictly adhere to the franchisor’s guidelines, ensuring consistency across all locations.
- Manufacturing Franchises
Manufacturing franchises allow franchisees to produce and sell the franchisor’s products under its established brand. This model is common in industries like food and beverage or car parts manufacturing. For example, a local bottling plant might produce sodas under the franchisor’s recipe and brand, distributing the products in a specific region.
- Investment Franchises
Investment franchises are typically larger-scale operations that require a significant initial investment. These franchises often involve owning multiple franchise units or entire geographic areas. Franchisees in this model may take a more passive role, hiring managers to oversee daily operations and managing financial growth. This model is common in industries like hotel chains and large restaurant groups, where the franchisee serves more as an investor than an operator.
How to Choose the Right Franchise
Given that the decision to enter the world of franchising can profoundly impact your life, it is important to approach it carefully. Research is a critical step in this process. Franchise directories, online franchise resources, and franchise expos are valuable tools for learning about a variety of franchise options in one place.
During your research phase, create a list of potential franchises that align with your interests, budget, and long-term vision. As you explore, dive deeper into each franchise’s business model, focusing on key aspects such as startup costs, ongoing fees, training, and support.
Reviewing the Franchise Disclosure Document (FDD) is an essential step. The FDD provides critical details such as financial performance, legal history, and franchisee obligations. This document will give you insight into the franchisor’s business practices and performance.
Don’t hesitate to connect with current franchisees. They can offer real-world perspectives on what it’s like to run the franchise, including challenges, rewards, and the level of support provided by the franchisor. Understanding their experiences can provide clarity on what to expect before making a decision.
Franchise consultants can also be an invaluable resource, especially for first-time franchise buyers. They can help match you with the right franchise opportunity based on your skills, interests, and financial capacity. Consultants often offer services free of charge, as they are compensated by the franchisors for helping them find suitable franchisees.
Making the Right Franchise Decision
Exploring franchise opportunities can be both exciting and rewarding, with many types of franchises to choose from. There is a model available for almost every skill set, lifestyle, and level of financial investment. Take your time to evaluate your strengths, goals, and preferences, and engage with industry experts to guide you through the decision-making process. By making an informed choice, you can set yourself on the path to building a successful business under the umbrella of a well-established and supportive franchise system.
If you’re looking for an engaging, ownership-driven franchise opportunity with a reputable national brand, consider exploring franchises like Spherion. With a robust support network and a proven business model, Spherion offers an excellent opportunity for building a successful recruitment business. Start your journey today and discover how franchising can help you achieve your entrepreneurial goals.
