For individuals who want the financial benefits of owning a business without the risk of starting their own enterprise, a franchise can offer the best of both worlds. As of 2019, there were over 773,000 franchise businesses operating in the United States, and that number continues to grow. And while many think of restaurants as the only example of a franchise business, in reality franchises represent a wide variety of industries and business models for would-be owners to explore.
So, what is a franchise, and how does it work? In this ultimate guide to the world of franchise businesses, we’ll take a closer look at different franchising models, examples of great franchises, and the many considerations that a franchise owner should make about their choice in starting a franchise business.
What is a Franchise Business?
At its core, a “franchise” is a license granted by a government or business allowing specific commercial activity. Okay—but for people interested in starting a business within the franchise model, what is a franchise in simple terms? Simply put, 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.
The history of franchising is long and storied. According to the International Franchise Association1, the earliest franchise agreements were political in nature; the English crown would regularly provide the church and aristocracy with land grants. In exchange for the freedom to farm the land and collect taxes, a franchisee would defend the land it was granted and pay a portion of collected taxes back to the Crown. These same types of franchise agreements drove European trade around the world and the colonization of the Americas through organizations like the Dutch East India Company and the London Company.
Early franchises weren’t just governmental, but also commercial; it was common throughout England during the Elizabethan period and earlier for tavern owners to franchise with breweries and receive financial support in exchange for exclusively serving that brewery’s products.
Modern franchise organizations arose in the United States with the Singer Company, and later General Motors. Coca Cola adopted a franchise system in the early 20th century for its bottling operations across the country. Here’s a direct link between that system and many of the modern types of franchises that exist today.
Types of FranchisingFast forward to the 21st Century: How does a franchise business work today? How exactly a franchise works depends in large part on the type of franchise model a business chooses to adopt. Generally speaking, there are 5 types of franchise models. These exist on a spectrum from less to more investment required by a franchisee, and are each utilized by businesses in a variety of different industries.
Job franchises are by far the cheapest for franchisees to start, often requiring little more than a basic investment in licensing fees and some equipment and materials. Job franchises are ideal for franchisees who don’t want to build a large business, but would instead prefer to work out of their home or a small office by themselves or with a small staff of 5 or fewer employees. These types of franchises offer little more than an established brand under which an entrepreneur can build a new business.
Common job franchises include:
- Travel agencies
- Coffee stands
- Computer and mobile phone repair businesses
- Home services companies like plumbing, HVAC, landscaping, and pool maintenance
Similar to job franchises, product franchises don’t typically provide a business plan or any specific system to follow. Product franchises instead focus on providing entrepreneurs with the opportunity to sell a franchisor’s products or services. This model is generally reserved for large retail operations dedicated to exclusively selling specialized products,though vending machines are often product franchises. This is responsible for more retail revenue than any other franchise model.
Common product franchises include:
- Car dealerships
- Appliance retailers
- Tire retailers
- Vending machines
Business Format Franchise
When most people imagine a franchise, they are likely picturing a business format franchise. In this model, franchisors grant franchisees with a license to operate a business with the franchisor’s established brand and complete business model. These types of franchises are commonly very high-touch, with franchisees expected to operate according to detailed franchise agreements that dictate everything from pricing to employee uniforms and conduct.
Common business format franchises include:
- Fast food restaurants
- Gyms and athletic clubs
- Consumer goods retailers
Some franchise businesses require a lot more from their franchisees than average business format franchises do. Where business format franchises set relatively low franchise fees, investment franchises are larger opportunities with a much higher barrier to entry because of the sheer size of the business and its associated costs. Hotels and other businesses that operate in this model can require significantly more upfront investment than other franchise opportunities. Investment franchisees might choose to bring their own management team into their franchise and operate it directly, or hire their own franchisees to handle operations.
- Common investment franchises include:
- Restaurant groups
Finally, conversion franchises are something of a hybrid of the above models, designed specifically to help an established business grow quickly by adopting a franchise model. Often, professional services companies will want to expand into new markets. They turn to a conversion franchise system to tap entrepreneurs looking to start their own businesses. They then essentially provide a business format franchise license agreement, entrusting franchisees to replicate the successful model in new locations.
Common conversion franchises include:
- Home services
- Financial services
- Real estate agencies
Another way of categorizing franchises is into 3 types of franchise:
- Traditional Franchise: The most basic of the above types of franchises—job and product franchises—are considered traditional franchises. Franchisees are obligated to only sell the products and services of their franchisor, and/or they may be given exclusive rights to sell those products and services in a specific market.
- Business Franchise: When a franchisor is providing more than a product or service to sell, it’s considered a business franchise. Business format franchises, investment franchises, and conversion franchises all fit into this model; the franchisor is providing an established brand plus an entire business plan for selling.
- Social Franchise: The newest of these three types of franchise is the social franchise, which is designed to empower governments and non profit organizations to address social issues like water and food instability by applying the same techniques of traditional and business franchises. By developing systems that can easily be replicated, social franchises aim to make it easier for organizations working with specific populations to effect change.
As you explore the different types of franchises, you still might be asking yourself an important question: “How does a franchise operate?” To provide a clear look at what the three most basic types of franchises look like in action, let’s take a look at three real-world examples of job, product, and business format franchises.
Job Franchise Example: MobileAppCity
Job franchises are defined by their ease of setup. They also appeal to individuals who want to start their own business and work from home on their own schedule. MobileAppCity is a fantastic example of this kind of franchise model with its low licensing fee of $20,000, established brand, and training to help owners build mobile apps for local businesses. This business does not require franchisees to follow a specific model, but instead equips them with training and support to help them build their own dream job.Click here to learn more about purchasing a MobileAppCity franchise.
Product Franchise Example: YourCBDStore
While some product franchises offer franchisees access to inventory to sell and little else, YourCBDStore is a unique franchise opportunity that backs up award-winning CBD and hemp products with a growing network of over 500 franchise stores. YourCBDStore requires both a licensing fee and a 2% ongoing royalty fee. In turn the franchisor provides ongoing training and support for everything from inventory ordering to in-store customer experience management. For entrepreneurs looking to enter the retail space with an in-demand product and without the strict business model of business format franchises, YourCBDStore is a perfect middle ground.Click here to learn more about purchasing a YourCBDStore franchise.
Business Format Franchise Example: Amazing Athletes
Not all business format franchises are restaurants. Case in point: Amazing Athletes, which provides franchisees with a complete business model for a year-round children’s fitness program that focuses on developing healthy habits and critical motor skills. Because this is a mobile program, there is relatively low overhead—no rent or facility costs. Amazing Athletes operates on a territory model, vetting 15-zip-code areas that meet minimum criteria for number of schools and childcare facilities for franchisees to operate within exclusively. While franchisees manage their own businesses, Amazing Athletes offers a complete, proven business model to follow. That makes this one business format franchise example that is great for franchisees of any background.Click here to learn more about purchasing an Amazing Athletes franchise.
Click here for a more in-depth look at franchise examples.
Franchise Owners: Responsibilities and Compensation
What is a franchisee? A franchisee is a small business owner who operates under a franchise agreement. Individuals who are good candidates for becoming franchise owners are committed to the idea of building a successful business. While they may be able to rely on their franchisor for important elements of success, they are ultimately responsible for managing and growing their own franchise. To better understand what a franchisee’s professional responsibilities look like, it’s important to also understand the specific roles both franchisors and franchisees play in a franchise relationship.
What is the role of a franchisor?
A franchisor provides franchisees with a variety of components to use in building a new business, including a brand, products and services, business models, and advisory support. Depending on the type of franchise model a given franchisor uses, their role can be very hands-off, or very involved with the day-to-day operations of a business. While every franchisor will not provide each of the following types of support, each one is something that generally falls under a franchisor’s purview:
- Brand Reputation: From simple job franchises to more complex business format franchises, all franchisees buy into one common thing: an established brand. That brand’s reputation among customers should be managed by franchisors at the highest level. That means spearheading brand-level marketing and PR initiatives as well as ensuring franchisees are maintaining consistent quality and meeting customer expectations.
- Product or Service Innovation: A small business is only as good as the products or services it provides to its customers. While a burger franchisor isn’t necessarily in the business of franchising the burgers themselves, they are in the business of selling burgers to hungry customers via their franchisees. It’s up to franchisors to conduct proper market research to ensure their products and services are meeting customer demand and remaining competitive.
- Advisory Support: Franchisees may be interested in building and running a business, but they are unique in that they aren’t necessarily interested in doing that from scratch. As such, quality franchisors are focused on providing advisory support to their franchisees, training them in business practices and helping them to thrive.
What is the role of a franchisee?
Franchisees take the products, services, brands, and business models of franchisors and manage the day-to-day operations of franchise businesses. If franchisors are responsible for setting the stage, franchisees are the ones running the show. Specifically, that includes:
- Following Franchise Agreements: At the most fundamental level, franchisees take on the full responsibility of following their franchise agreements. Franchise agreements will establish standards for things like hiring practices, pricing, product and service delivery, and more. Whether a franchisee has bought into a simple job franchise and is utilizing a franchisor’s proprietary systems to offer their own unique products or services to the market, or they are managing a business format franchise like a fast food restaurant with very specific approaches to every aspect of the business, their primary commitment is to follow the agreement and uphold the standards of their corporate brand.
- Managing Operations: In practice, upholding franchise agreements means actually running the business. Franchisees are the leaders of their own business, managing teams and handling the day-to-day operations of their franchise.
- Sales and Marketing: While franchisors can be expected to provide high-level marketing support, franchisees are also typically expected to ensure their business is growing. That means overseeing marketing initiatives to engage customers and handling the entire customer experience through the selling process.
How do franchisees make their money?
Franchisees make money the same way any small business owner earns income. This can be through salary, dividends paid from profits, or a combination of both. That said, the details of how franchisees actually get paid can vary depending on the business structure their franchise utilizes. In addition to normal business expenses, franchisees also pay startup costs and, in some cases, ongoing royalty payments to franchisors based on their revenue.
Limited liability companies and sole proprietorships are pass-through entities, meaning that owners don’t pay themselves a salary, but instead include their business’s total revenue, less expenses, on their individual tax returns. In those cases, the profit after expenses is a franchisee’s take-home pay. Corporations and LLCs that opt to be taxed as corporations can allow business owners (including franchisees) to pay themselves a salary as part of the business’s normal payroll expenses, saving owners from paying self-employment taxes on at least a portion of their profits.
Regardless of the specific mechanism for getting paid, Franchise Business Review found in a survey of over 28,000 franchise owners that their average pre-tax annual income is $80,000—though depending on the franchise, it can be much higher.
Franchise Advantages and Disadvantages
For the right type of business owner, purchasing a franchise offers the opportunity to be your own boss without the risk of starting an entirely new enterprise. We say the “right” type of owner because franchises come with their own unique set of advantages and disadvantages. In many instances, the advantages of a franchise greatly outweigh the disadvantages, giving entrepreneurs a solid foundation upon which to build a future.Advantages of a Franchise:
- One of the primary advantages of franchising is stability. Franchises have a much lower rate of failure than traditional startup businesses.
- Especially with business format franchises, business owners don’t need to come to the table with a breadth of business experience, but can lean on the established model of a franchisor.
- Because franchises are designed to be replicated, there are often efficiencies in process and in scale that can make starting a franchise cheaper than starting a similar business from scratch.
- Franchisees can leverage an established brand’s reputation and marketing to enter their own market more easily; even as a new business, they can expect a certain level of familiarity among customers—and in some cases, pre-built loyalty.
Disadvantages of a Franchise:
- One of the disadvantages of a franchise business for a franchisee is the structure; the detailed business model provided by the franchisor might not leave much room for creativity or independence in operations.
- Franchisees are often at the whim of franchisors. There’s no guarantee that a franchisor will extend a franchise agreement past its original time frame, and top-down decisions from corporate can influence the success and profitability of a franchise business. In some cases, unprofitable pricing might be enforced by a franchisor for marketing purposes; Subway’s footlong sub isn’t profitable, but it does get customers in the door to make other purchases.
- While franchisors are responsible for maintaining their brand image on a high level, other franchisees can also play a role in how the public perceives an owner’s business. Poor management on the behalf of fellow franchisees can reflect poorly on even the best managed franchises.
When it comes to evaluating which franchises are the best, there’s no one standard to follow. Different business owners will be drawn to different industries and business models. For example, someone who wants to work from home on their own might not be a great fit for business format franchises. On the other hand, the most profitable franchises might come with more restrictions and responsibilities than some franchisees are looking for in their professional life.
For a closer look at the best franchises available and how to find the perfect fit for your vision of the future, including a list of the best franchises to own in 2021, explore our Best Franchises resource page.
Low-Cost Franchise Options
For some franchisees, the best franchise opportunities are also the cheapest franchises to open. Franchising doesn’t always require a huge amount of money, and there are many low cost franchises with high profit potential to consider. If you’re interested in finding the right balance between your up-front investment and earning potential, take a look at our Low-Cost Franchise resource page.
Looking for Your Next Franchise Opportunity? Turn to Franchise.com.
Since our founding in 1995 as one of the world’s first franchise recruitment websites, Franchise.com has become the industry’s trusted leader in franchise business. Providing franchisees with tools to explore their options for franchise businesses plus resources to grow and thrive, we are dedicated to helping individuals from all walks of life find freedom and success with the franchise business model.
As you continue to search for the right business opportunity for you, lean on our network for the powerful search tools and support you need to move forward with confidence. Click here to explore our franchise resource library for more information, or click here to explore available business franchises and request more information.