Compare and Understand the Best Franchise Business Models for You

Franchising is a great way to start a business while having the backing of a larger, well-established company. In a franchise, one company (the franchisor) allows another person or business (the franchisee) to operate their own outlet using the franchisor’s brand, product or services, and systems. In return, the franchisee usually pays a franchise fee and ongoing royalties to the franchisor for continued support.

While this arrangement is the same across most franchises, there are actually some pretty significant differences in the ways that each of the major types of franchise business models operate. Each one comes with its own level of involvement, costs, and responsibilities, which makes narrowing down your choice of model an important part of the process of choosing the best franchise fit for you. If you’re considering franchise ownership, read on to learn more and improve your understanding of franchise business formats.

The basics of franchise business models

A franchise business model is a system where a franchisor licenses its brand, business methods, and support services to a franchisee, allowing them to operate a business under the established name. The franchisee benefits from using a proven business framework while still having ownership of their individual location. The franchisor, in turn, expands the business by leveraging the franchisee’s investment and local management. 

In every type of franchise, the relationship between franchisor and franchisee is dictated by a franchise agreement, a legal contract outlining the terms both parties must follow. Some of the components of this agreement include:

Initial fees and ongoing royalties: 

The franchisee typically pays an upfront fee to join the system, along with a percentage of revenue as ongoing royalties.

Territorial rights: 

This section specifies whether the franchisee has exclusive rights to operate in a certain geographic area.

Brand standards and operational guidelines: 

Franchisees must adhere to certain operational procedures, which ensures consistency across all locations.

Training and support: 

Franchisors usually provide training, marketing support, and ongoing assistance to help franchisees succeed.

Length of the agreement: 

Franchise agreements usually last for a set term, after which they may be renewed or ended.

How is a franchise different from other small businesses?

In a traditional setup, a business owner has full control over operations, branding, and decision-making. They build their brand from the ground up, assuming all risks and responsibilities. But with a franchise, franchisees operate within a pre-existing brand and business model. They gain the advantages of built-in brand recognition and operational guidance, but they must also adhere to franchisor guidelines, often giving up some decision-making freedom in exchange for the support and reduced risks that come with the franchise model. 

Common types of franchises

For those just beginning to explore different franchise models, it might seem as if they all fall under one “franchise” bucket, but franchises come in various forms, each catering to different business goals and industries. Understanding the different types of franchise models—as well as the advantages and disadvantages of each type—can help potential franchisees zero in on the right fit for them. There are many franchise structures, but the most common ones include product distribution franchises, business format franchises, manufacturing franchises, and investment franchises. 

Product distribution franchises 

These are centered around the franchisee selling the franchisor’s products, usually in a wholesale or retail environment. You’re familiar with this type of franchise in the form of, for example, car dealerships or gas stations. In these arrangements, the franchisee is responsible for getting the franchisor’s products into the hands of customers, and they may have more flexibility in managing their operations compared to other franchise types. 

Advantages:

• Greater autonomy: Franchisees typically have more control over how they run their day-to-day operations.
• Lower brand restrictions: The franchisee has more flexibility in areas like customer service or inventory management.

Disadvantages:

• Limited support: Franchisors tend to provide minimal training or guidance beyond product sales.
• Operational risk: Without full structure and guidance, franchisees will need to take on more responsibility and risk.

Business format franchises 

In this model, the franchisee not only sells the franchisor’s products or services but also follows a comprehensive system that covers everything from branding and marketing to operations and customer service. Popular examples include fast food chains like McDonald’s or a staffing franchise like Spherion. In business format franchises, consistency is the name of the game, so franchisees closely adhere to the franchisor’s guidelines. 

Advantages:

• Support: Franchisees receive tools, guidance, training, and assistance with marketing and operational systems.
• Proven models: Franchisees closely follow a tested business plan, reducing the risk of failure.

Disadvantages:

• Less flexibility: Franchisees must adhere to strict operational and brand guidelines.
• Fees: Business format franchises usually require royalty payments or marketing fees, as well as a higher initial investment due to the extensive support offered.

Manufacturing franchises 

These allow the franchisee to produce and sell the franchisor’s products under the franchisor’s brand. This type of franchise is common in industries like food and beverage or automotive parts. For example, a local bottling company might produce soft drinks using the franchisor's recipe and brand, distributing them within a set territory. 

Advantages:

• Control over production: Franchisees can have more control over the quality and output of the products they manufacture, offering a greater sense of ownership.
• Exclusive rights: Franchisees often receive exclusive rights to manufacture and sell products within a designated region, reducing competition.

Disadvantages:

• High capital investment: Setting up manufacturing facilities can be costly, requiring large-scale investments in equipment and infrastructure.
• Complex operations: Manufacturing can involve managing a workforce, supply chains, and logistics, making it more complex and demanding.

Investment franchises 
These are typically larger, requiring a bigger upfront investment and often involving the ownership of multiple franchise units or even entire regions. The franchisee in this case may take a more passive role, hiring managers to run the day-to-day operations while they focus on overseeing financial aspects and growth. This model is common in industries like hotels or large restaurant chains, where franchisees act more as investors than hands-on business operators. 

Advantages:

• Potential for high returns: With a large initial investment, franchisees can reap big financial rewards, especially if they own multiple units.
• Less hands-on involvement: Investment franchises often allow for a more passive role, with franchisees hiring managers to oversee daily operations.

Disadvantages:

• Substantial financial commitment: Investment franchises typically require a large upfront investment, making them accessible only to those with significant capital.
• Higher risk: The potential financial risk is greater due to the larger investments involved, especially if the franchise underperforms.

Factors to consider when you explore franchise business models

Now that we have an idea of the different franchise types, it’s time to take a look at how each franchise model might fit with your skills, finances, and life goals. We’ve covered the five key factors to consider when choosing your ideal franchise in detail elsewhere, but we’re including a short summary here as well:

• Your background plays a huge role in determining the type of franchise that will suit you best. For example, if you have experience in sales or customer service, you may prefer a business format or product distribution franchise with lots of customer interaction. On the other hand, if you have experience in manufacturing or logistics, a manufacturing franchise might make more sense. 
• Your financial commitment can vary from relatively affordable product distribution franchises to high-investment business format or manufacturing models. Think about how much capital you’re willing to invest upfront, and whether you’re comfortable with the ongoing costs like royalties, marketing fees, or operational expenses. 
• Different franchise models call for different levels of involvement. How much time can you realistically commit—and how much do you want to? If you want to be involved in day-to-day operations, a business format or product distribution franchise might be the best choice. On the flip side, if you need time to focus on other priorities, an investment franchise might be more appealing.
• The success of your franchise will depend largely on the demand for the product or service in your local market. Before committing, research the level of competition in your area. Consider factors like customer demographics, local buying habits, and how well the franchise concept aligns with community needs. For instance, if you’re considering a fast food franchise, but your area already has numerous similar options, it may be harder to establish yourself. 
• And finally, when exploring franchise business formats, it’s important to align your choice with your long-term business goals. Do you want to build a business you can pass on to your family, or are you looking for a shorter-term venture to sell for profit down the line? Additionally, consider how scalable the franchise model is; if you plan to own multiple units or expand into different regions, make sure the franchise structure can support that. 

Resources for determining the right franchise fit for you

Because choosing the right franchise can be a life-changing decision, it’s important to approach the process with care. After you’ve considered all of the above, you’ll probably want to conduct some additional research—and online franchise directories, franchise expos, and trade shows are a great place to start. With these, you can gather information on a variety of options in one place. As you explore, begin creating a list of potential franchises that fit your interests, budget, and long-term vision.

With this list, you can dive a level deeper and seek out detailed information about each franchise’s business model, including upfront costs, training, and ongoing support. As part of this, you’ll probably review franchise disclosure documents, which offer key details like financial performance, litigation history, and franchisee obligations.

Don’t be afraid to reach out to current franchisees as well! They can provide firsthand insights into the challenges and rewards of the business, the level of support provided by the franchisor, and the financial realities beyond what’s in the franchise agreement. 

And for a little extra support, franchise consultants can be an invaluable resource, especially for those new to franchising. They help match potential franchisees with suitable franchise opportunities based on their skills, interests, and financial situation—all at no cost to the franchisee. They can also assist with reviewing franchise agreements, analyzing financial obligations, and understanding market trends.

Exploring franchise opportunities can be exciting and rewarding

With so many different types of franchises available, there’s a model out there for nearly every skill set, interest, and lifestyle. Take the time to research, evaluate your strengths, and talk to industry professionals to find the right fit for you. 

And if you're seeking an engaging, owner-operator experience with a reputable national brand, consider looking into franchising with Spherion. With its strong support network and proven business model, Spherion offers a fantastic opportunity to build a successful business in the staffing industry. Start your journey today and see how franchising could help you reach your entrepreneurial goals.