The 3 Types Of Franchises You Could Own

Quick Guide: 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, and with the franchisor’s assistance. Examples: Subway (fast food chain), Marriott (hotel chain), Hertz (car rental company), Nike (retail outlet), The UPS Store (mailing and shipping outlet), Great Clips (haircut salon).
  • Manufacturing Franchises: The franchisee buys the license to produce a branded product, or part of a product, in accordance with the franchisor’s practices and standards. The product is then further assembled and/or distributed to consumers via downstream channels. Common examples include automotive manufacturers (Hyundai) and beverage manufacturers (Coca Cola).
  • Product Franchises: 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).

Business Format Franchises

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, to hospitality, along with many others.  Some popular examples include McDonald’s, H&R Block, Starbucks, Jamba Juice, Hilton Hotels, and 7-Eleven.

Usually, it is not obvious to the consumer whether a chain establishment is company-owned or franchised because the consumer experience varies minimally or not-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, 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.

Pros & Cons Of Business Format Franchise

The Pros:

  • You have a certain level of autonomy, as you own and operate your own business.
  • You have a built-in base of customers who are already love your product.
  • You have the security of a proven business model.
  • You receive corporate guidance, training, and marketing.

The Cons:

  • You have very little say in how you run your business—where you purchase raw materials, how you deliver the product/service, which business management software you use, etc.
  • The franchise fee and other costs of doing business can be prohibitively expensive, with no way to control these costs, which are determined by the franchisor.
  • The profit margin is narrow (compared to running your own business), due to high operating costs and franchise fees.

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 skill-set but want to own and operate your own business.
  • You have or can access 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.

Manufacturing Franchises

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 the cost of production is cheaper. Some examples include automobile and automotive parts manufacturers, computer manufacturers, clothing manufacturers, and food and beverage manufacturers. Not all consumer product use manufacturing franchises; some trademarked products are manufactured by company-owned facilities.

Coca Cola is an example of a company that 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 and carbonation, and then bottles and distributes the drinks.

Manufacturing franchises must pay the franchisor a fee in 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 so that it meets 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.

Pros & Cons Of A Manufacturing Franchise

The Pros:

  • With an efficient production system, you can potentially make a substantial amount of money.
  • You may have a certain amount of autonomy as to how you run your operations, as long as you produce the product to the franchisor’s specifications.
  • You do not have to worry about sales, marketing, or any other customer-facing aspect of the business.

The Cons:

  • Startup and overhead costs are both substantial.
  • Fluctuations in raw material and energy costs can cut into your profit margin.
  • You need to meet a number of strict codes and specifications, adhering to the company’s policies and all relevant laws.

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; for example, here are the requirements to become a Coca Cola supplier.

Product Franchises

A product franchise, also sometimes called a “product distributor” franchise, is a business model in which a company agrees to sell a trademarked product, either exclusively or not. Some examples include car dealerships, auto parts suppliers, tire stores, and convenience store inventory. The car dealership may sell a franchisor’s product exclusively, while a convenience store may agree to purchase a certain number of units, or agree to sell the franchisor’s products to the exclusion of certain competing products. Vending machines can also be considered a type of product franchise. Many gas stations, including Exxon, follow a product franchise model as well.

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.

Pros & Cons Of A Product Franchise

The Pros:

  • You benefit from the reputation of name-brand product, without having to produce it.
  • You have very few upfront costs, apart from the cost to purchase the wholesale products from the franchisor.
  • You have the flexibility to run your business how you see fit.

The Cons:

  • You could find yourself stuck with a surplus of an unpopular product, possibly forcing you to sell the product at a loss.
  • You receive no or minimal support/assistance from the franchisor.
  • You need to own your storefront where you can distribute the product.

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.

Final Thoughts

There are three main types of franchising relationships, each of which represents 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/skill-set, and the amount of capital you can access, you might decide to open a business format franchise, product franchise, or a manufacturing franchise. Or, you might just 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:

  • The Step-By-Step Guide To Buying A Franchise
  • Franchise Financing: The 7 Best Places To Get A Franchise Loan
  • How Franchises Work: The Complete Guide For Entrepreneurs

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