Running a franchise is a great way to harness an existing business’s intellectual property. That might be why franchises in the US employ almost 8.4 million people.
But not all franchises are the same. There are actually five major franchise types, and each one is quite different. If you’re thinking about making the leap into running a franchise, it’s important to know all about the different franchise types.
If you’re looking to learn more about different franchise types, this article is perfect for you. This guide will explain how the different types work, along with their pros and cons. Keep reading to find out everything you need to know about the topic.
1. Job-Franchise
A job franchise is a low-investment franchise, often run from home. These are a great way to make use of your skills and experience while slowly growing a business.
Let’s say you’re working as a pool cleaner for a local business. After some time on the job, you might start wondering why your employers need to take a cut of the money you’re making. In that case, you may decide to strike out on your own and start up a job franchise.
Common Job Franchises
Job franchises are small franchises that are perfect for those just starting out. Normally, they are businesses that require limited equipment and personnel to run. Some common examples include:
- Food franchises – a food job franchise might include a food truck franchise or coffee kiosk franchise.
- Lawn care
- Cell phone repair – most cell phone repair franchises are retail, brick & mortar franchises that require a substantial investment. This is not a good fit. Carpet cleaning or pet walking or pool cleaning or a leather repair franchise would make more sense.
- Cleaning services
Generally, these kinds of franchises will be operated by an individual and perhaps a handful of friends or family. They might be operated casually or part-time alongside a day job. You could run your business as a husband and wife team, or draft in a few neighbors to help out and earn some extra cash.
Advantages
A job franchise requires very little investment, so it’s perfect for those looking to get their foot in the door. Most people can save up a small amount of money from a day job to get started.
These franchises also allow the owner to work flexibly. With minimal commitments in terms of regular capital outgoings, franchise owners can choose to take time off when they need it.
Managing a lawn care or cleaning franchise is similar to other forms of self-employment. The only thing limiting your hours and potential income is you. That means your income from a job franchise can vary heavily depending on your individual circumstances.
Job franchises also provide budding entrepreneurs with the opportunity to get a foothold in business. If you lack capital or experience, you might be unable to get started with one of the other franchise types. Starting with a job franchise will help you to build capital while honing your business skills.
Disadvantages
Job franchises don’t generally have the capital or resources to compete with big companies. They are largely restricted by the hours their owner can work. They may also be restricted to a certain area.
That said, job franchises can sometimes be expanded into much bigger businesses. Many huge operations got their start as humble one-man franchises and have now grown into household names.
Job franchises often don’t come with much brand recognition. You will need to work hard to get your name out in the community. After a few months, you’re sure to build a good reputation, but you won’t get the instant recognition that comes with other franchises.
If you run a job franchise, you will also need to be a strong self-starter. Since you may only be working with a handful of friends or family members, it’s important to push yourself to make the best of your franchise.
2. Product/Distribution Franchise
Product franchises, sometimes known as distribution franchises, focus on selling and shipping the products of a given brand. Product franchises normally distribute larger products, like computer parts or kitchen appliances.
These kinds of franchises require a little more working capital than job franchises. Franchisees will need the means to distribute large quantities of goods safely. They may also need access to storage areas, like warehouse space.
People with experience in logistics, transport, or management normally invest in product or distribution finances. If you don’t have a background in any of these fields, consider taking an online course on the topic. Although this isn’t compulsory, a little extra knowledge can go a long way.
Advantages
Product or distribution franchises remove the need for franchisees to focus on many different aspects of their business. This allows franchisees to focus solely on getting products to where they need to go.
If you can distribute a large number of products, you can quickly increase your revenue streams. The amount of money you can make from distribution might surprise you.
Disadvantages
Most product/distribution franchises place firm restrictions on your business. You won’t be able to ship the products of your choosing, but you will have to ship products produced by your partner organizations.
If you want to get the best out of your product/distribution franchise, you will need to invest a modest amount of capital. As already mentioned, warehousing space and staff members may be required to make your franchise successful.
3. Business Format Franchise
A business format franchise allows you to use the branding and products of a major corporation.
Business format franchising is very common across the world. When you walk into a McDonald’s or a Subway restaurant, you can be sure they are following the business format franchise.
Generally, these businesses have to pay a franchise fee to a central corporation, along with a certain proportion of their profits in perpetuity. McDonald’s franchisees must pay an upfront franchise fee, then between 12% and 21% of net profits.
Advantages
Business format franchises give franchisees a proven brand and list of products. They also receive support and corporate guidance, allowing them to focus on daily business while this support network handles the bigger picture matters.
Disadvantages
The requirement to continually pay fees and royalties can soon take a sizable chunk out of your profits. As your franchise grows, you may wonder if it’s still necessary to be part of the franchise or if you could make more money by selling your own products.
Be very careful about making the switch. Many customers gravitate towards known brands, so if you suddenly strike out on your own, they may not find your new identity appealing.
Some business franchises may also lock you into a lengthy contract. McDonald’s requires franchisees to commit to running a location for a minimum of 20 years.
4. Investment Franchise
Investment franchises require the highest capital investment of any franchise type. Generally, investors in this area invest a large capital sum. Then, they will install their own management team and take something of a hands-off approach.
Common examples of investment franchises include hotels and gyms. These are big businesses with large numbers of people on staff and big outgoings. They are normally part of major chains like Planet Fitness or Comfort Inn.
It’s a dream for many people to own investment franchises. But if you’re new to the franchising game, you might have to work up to owning an investment franchise.
Advantages
Investment franchises can offer a huge return on investment. As these are generally larger businesses, they enjoy a higher turnover. If you manage to invest wisely and make good decisions with the franchise, the returns can be extraordinary.
Many investment franchises offer a highly recognizable brand and a strong support network for franchisees. When people see the familiar branding, they’ll be more likely to spend money at your establishment. They can even book services using the company’s central website.
For those looking to maximize their revenue with limited time, investment franchises can work like a dream.
Disadvantages
As the name suggests, you’re going to shell out some serious capital if you want to get a hand in an investment franchise. For many people, making an investment like this is untenable.
With a greater investment comes a greater risk. If you are pumping lots of capital into the franchise, you must remember that you could lose it all if the franchise is unsuccessful.
Since investment franchises are normally run by hired management teams, you will need to get used to taking a more hands-off approach to your asset. It’s all about striking the right balance between strict control and total absence.
5. Conversion Franchise
Conversion franchises offer a unique franchising opportunity. They allow the franchisee to take over existing businesses and convert them into franchises.
Convenience stores and small restaurants are often taken over by conversation franchises. You might have noticed the mom-and-pop stores in your neighborhood switching to familiar franchise branding. Very likely, these businesses are now part of a conversion franchise.
To make a success of conversion franchising, you will need to have a strong business sense. You’ll need to identify which businesses could successfully be converted into a franchise. Can you find a struggling establishment that needs rescuing or a successful business that might benefit from franchising?
Solid local knowledge is often an advantage here. If you know about markets in a given city or region, you’ll be well-placed to find hidden gems. If you lack this specialist knowledge, consider working with local contacts or agencies to help you find the right options for your investment.
Those with plenty of capital to spare can quickly build up a strong conversion franchise. You could buy dozens of establishments in a short time and create your own empire if you have the resources. But be wary of doing too much too soon.
Advantages
Conversion franchises allow you to maximize the profits of an existing business. If you can identify strong candidates in a given area, you’ll be able to take them to the next level and reap the rewards.
Taking control of an existing business can offer some advantages too. You can make use of the existing business’s assets, including its property, equipment, and staff. This allows you to set up quickly and perhaps save money on your investment.
Disadvantages
Taking a successful business and rebranding it can come with its own set of pitfalls. There are lots of reasons a business might do well, including brand recognition and loyalty. If you rebrand a successful business as part of a bigger franchise, local people may choose to spend money elsewhere.
Some conversion franchises tend to buy up less successful businesses, taking advantage of their low cost and hoping a new brand will turn fortunes around. But there may be a good reason these businesses were struggling, and franchising will not necessarily help.
General Franchising Benefits
Franchising in general has many benefits. One of the key advantages is reduced risk..
When you buy into a successful franchise model, you know you’re working with a brand that has already been successful. You have a set of products and processes that have been proven to sell well.
The different types of franchising also offer a great deal of flexibility to those looking to make an investment. You can invest in anything from a lawn mowing business to a hotel chain and still have the chance to make profits.
Choose From the Different Franchise Types
Before you invest in your first franchise, it’s important to know about the different styles of franchise. When you do plenty of research into the different franchise types, you’ll be able to make the best decision for you.
America’s Best Franchises is a directory of franchises with a proven business model. We have sorted successful franchise opportunities into relevant franchise categories and subcategories to make your search for a business venture as easy and efficient as possible. At America’s Best Franchises, we focus on you – your passion, your skill sets, your goals and your needs. Click here today to search franchises by industry.
