Buying a franchise is a great way to become an owner of a small business. For entrepreneurs who want to own their own business but don’t like the risk of unknowns, a franchise is the perfect solution because it is proof of a successful model already in motion.
So what is franchising? A franchise business is one in which a brand establishes a business model, then licenses the business and materials out to franchisees, who then own and operate a business that follows the franchisor’s business plan. Many methods of franchising exist. Before buying into a franchise, it’s important to answer the question “What are the main types of franchising?” Let’s take a closer look at the types of franchises, examples of these franchises, and how to choose a type of franchise to invest in.
Types of franchises
There are five main types of franchises: job, product, business, investment, and conversion. It’s important for entrepreneurs to understand the difference between these types of franchises in order to choose one that best suits their business needs and goals.
A job franchise is generally a low-investment franchise, often home-based, that can be operated alone or with a staff of fewer than five people. The franchisee is only required to pay a franchise fee and minimal startup costs, like equipment, basic materials, and sometimes a vehicle. A large number of industries can be franchised in this manner, generally providing services.
Common job franchises are coffee stands, cleaning services, event planning, plumbing, pool maintenance, and travel agencies.
Job Franchise example: Bloomin’ Blinds
Bloomin' Blinds is a work-from-home, mobile business that requires virtually no overhead. The franchise offers widow treatment sales, installation, and repair; many franchise owners also add additional revenue streams including blind cleaning, window washing, solar screens, exterior/patio screens, etc. Bloomin' Blinds provides the franchisee with marketing tools, advanced training, and friendly business culture.
Product distribution franchising, also known as trade name franchising, is similar to job franchises. Though this type of franchise is not as well known, it makes up for more total sales than all business format franchising combined. In product distribution franchising, the franchisor manufactures and supplies products to franchisees who pay a fee to use the product’s name and trademark.
Product franchises don’t typically provide a business plan or any specific system to follow, instead, franchisees are often known as dealers who have bought the rights to distribute products from the manufacturer. This model is generally reserved for large retail operations dedicated to exclusively selling specialized products. This is responsible for more retail revenue than any other franchise model.
Common product franchises are car dealerships, appliance retailers, tire retailers, and vending machines.
Product Franchise example: Passive CBD Vending
Passive CBD Vending offers a unique combination of high-quality vending machine distribution and wholesale CBD products that provides a very actionable and profitable business opportunity. Those who are first to place these machines in the best high traffic areas will undoubtedly reap the rewards. The Passive CBD franchise offers everything for a high revenue business, including high tech vending machines, guaranteed placement in high traffic areas, passive income, and CBD products that are medical grade, THC free, certified organic, and certified non-GMO with certificates of authenticity.
Business format franchise
Business format franchising is the most popular out of all the types of franchising and is what most people think about when talking about the franchising industry. This is likely why a common objection to franchising is, “I don’t want to work in fast food.”
A franchisee under the business format operates his or her business under the parent company’s brand, plus gets the entire proven system under which to operate and market the products or services.
The parent company provides a detailed plan, complete procedures, and thorough training on almost every aspect of the business, as well as both initial and ongoing support.
Common product franchises are fast food restaurants, retail stores, or fitness centers.
Business format franchise example: The UPS Store
The UPS Store focuses on the importance of a healthy work-life balance. When a franchisee becomes an owner of a UPS store, USP helps find the right balance as they pursue their entrepreneurial aspirations and unique personal and financial goals. The UPS Store offers a diverse selection of franchise opportunities to serve their community with print, copy, packing and shipping services. All their franchise models are backed by in-depth training, support, and the respected, award-winning The UPS Store brand.
An investment franchise is similar to a business format franchise but requires a lot more from their franchisees. These types of franchises are large opportunities with a high barrier to entry due to the size and associated costs of the business. Many businesses operating in the investment franchise have a very high startup cost and require significant upfront investment compared to other franchise opportunities. The franchisee is usually an investor who provides the money and management team to the business. Sometimes they involve their own franchise. An investment franchise is primarily used to produce a return on investment with little personal involvement, as well as a possible capital gain on exit.
Common investment franchises are hotels and restaurant groups.
Investment franchise example: Dickey’s Barbecue Pit
Dickey's Barbecue Pit claims to be a true American success story that serves Texas barbecue across the world. In 1941, Travis Dickey opened the first location in Dallas, Texas. By 1994, Dickey’s expanded nationwide with its first franchise locations. Today, they have evolved into a global brand with more than 500 stores.
Of the five types of franchising, conversion franchising is the only one that is a hybrid. Conversion franchising is designed specifically to help an established business grow quickly by adopting a franchise model. In this type of franchise, an independent company with a foundation and clientele enters into a relationship with an existing company and converts it into a franchise unit. The franchisee adopts the parent company’s trademarks, marketing and advertising programs, training system, and client service protocols. Since the independent company isn’t starting up a new business location from scratch, it’s a way for the company to experience rapid growth. They also benefit by gaining the strength of a popular, successful brand, and all the support systems that come with it.
These types of franchising are popular among home, financial, and real estate industries. Some well-known examples of businesses that use conversion franchising include Century 21 and Ace Hardware.
Another way to categorize the types of franchises
Another way to categorize the types of franchises is into three categories instead of five. These three categories are known as traditional, business, and social franchises.
A traditional franchise is the most basic type of franchise. In these types of franchises, the franchisee is only obligated to sell specialized products and services in a specific market. The job and product franchises listed above are considered transitional franchises.
A business franchise is when a franchisor provides an established business plan, brand, and a method for selling. This type of franchise is more than just a product or service to tell, but instead is an entire business with multiple products and moving parts. The business format, investment, and conversion franchises all fit into this model category of franchising.
A social franchise is the newest of the three types of franchises and doesn’t particularly have a comparison in the five types of franchises above. Social franchising is designed to empower governments and nonprofit organizations to address social issues, such as water and food instability. A social franchise applying techniques from both traditional and business franchises. This method of franchising’s main goal is to make a simple path for organizations working with a specific population to effect change by developing a system that is easily replicated.
Questions to ask before choosing a type of franchise
Since each type of franchise is different, the right franchise for one entrepreneur could differ from another entrepreneur. It’s essential for an entrepreneur buying into a franchise to understand their personality and interests, knowledge of the field, time investments, and financial stances before committing to a specific type of franchise.
- What are my personal goals?
- Why type of industry do I want to conduct business in?
- What are my strengths and weaknesses?
- What role do I want to play in the business?
- What type of commitment do I want to make?
- What kind of risk do you want to assume?
- What is my investment budget?
- How long do you want to be in business and what is your exit strategy?
Once an entrepreneur commits to a franchise, understanding the franchise agreements and contacts are crucial. When agreeing to sign on to a franchise, it’s important to know what the key stakes are that every Franchise agreement should have.
From conversion to business format, here are franchise agreement best practices:
Get legal advice: Hire a lawyer when negotiating with a franchisor. Without legal advice, franchisees may end up getting the short end of the stick – a particularly tricky predicament, especially when personal guarantee provisions are involved.
Know what territory you're being provided: Franchise agreements may or may not offer exclusivity for a certain territory, whether that's a certain block, neighborhood, ZIP code, or distance from your location.Understand the difference between "may" and "shall": Be clear from the get-go as to what the franchisor must provide and what they can, but don't have to, provide. "May" means that the franchisor could provide something but is under no legal obligation to do so, while "shall" means that the item in question must be honored.
Don't expect drastic changes: While negotiating is part of the franchise agreement process, don't expect drastic changes to your agreement, especially from well-established and globally recognized brands that have been in operation for decades. Seek legal advice for best practices on what you can request to change and what your chances may be for revised provisions.
Three elements must be included in a franchise agreement:
Franchise fee: Some amount of money must be paid by the franchisee to the franchisor.Trademark or trade name: The franchisee must be permitted in the agreement to use the franchisor's intellectual property, such as logos and trade names.
Trademark or trade name: The franchisee must be permitted in the agreement to use the franchisor's intellectual property, such as logos and trade names.
Marketing system or a method of operations: The franchisee must be provided with either a system for marketing and advertising, such as posters and promotions, or proprietary information on how to run the franchise, such as a method of operation, so it looks and feels like others with the same name. Depending on the type of franchise, some franchise agreements provide both. For example, a fast food restaurant may provide a marketing system and a method of operations, while a janitorial service may provide only a method of operations.
If an agreement includes these three elements, federal law automatically regards it as a franchise agreement, no matter what it may be called.
Buying into a franchise can come with risks and rewards, but understanding the types of franchises can help entrepreneurs make the best decision possible when forming their business investment.
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