Types of Franchise Businesses

Franchises are one of the most popular forms of business. They contribute at least $1.6 trillion to the US economy. It is very important that a franchise owner maintains the quality of products or services as per the standards laid out by the franchisor.

By opting for a franchise business, the franchisee earns the right to sell an already successful product or service owned by a business and, thus, becomes a part of it. First, if you are not already familiar with two most commonly used terms in the business of franchise, let me explain.

• Franchisor: The company is the actual owner of the product/service. It also owns the rights and licenses for the product or service. It agrees to grant a franchise to the franchisee in return for an initial start up fee and a subsequent monthly fee.

Franchisee: It is an individual(s) who enters into a contract with the franchisor to use the brand name and trademark to sell the product/service in return for a franchising fee.

There are different types of franchises that you can choose from. Take a look at the table below to decide which would be the most suitable type of franchise business for your needs and requirements. But, first let's classify these different types of businesses based on different characteristics.

Manufacturer Franchise
Common in the food and beverage industry, adopting such a type of franchise business allows the franchisor to manufacture the product in his factory under a license as per the franchise contract. He also sells the products using the franchisor's trademark and company name.

Apart from a franchising fee, the franchisor may also charge a fee on per unit product sold. Manufacturer franchises are prevalent in the beverages industry and petroleum industry.

Product Franchise
The franchisee is not allowed to produce the product but can only acquire them from the franchisor who has full control of the distribution method of the product adopted by the franchisee. The franchisee must pay a certain amount of fee to take benefit of the franchisor's brand name, reputation among consumers and trademark.

Also, in some cases, the franchisee is required to promise to buy a certain minimum amount of inventory from the franchisor. Such a type of franchise business is popular between manufacturers and retailers. A product franchisee functions are limited to only the sales and distribution of products and services.

Business Format Franchise
This is one of the most popular types of franchises. The franchisee is given a proven business model developed and owned by the franchisor. He is also given assistance to provide training to employees, installing machinery and setting up the business overall.

However, the franchisee has to pay a royalty fees. Also, the franchisor may provide raw materials and maintenance of machines at subsidized rates. Examples of such a type of franchise business are jewelry stores and apparel brands.

Business Franchise Venture
A franchisee who owns a business franchise venture distributes products or services, on behalf of the franchisor, to a certain customer base, provided by the franchisor, to maintain its customers. The franchisee gets a certain percent of sales as a commission.

An example of business franchise venture is vending machines that are owned and installed at public places by the franchisee. They earn a percentage on every sale made.

Existing Franchise
Existing franchises are safe for those individuals who want to own a franchise without the hassle of setting it up. Such a person may already own other franchises or may be new to franchising. Such franchises save time because the new owner takes over a franchise unit that was previously owned by another franchisee.

Existing franchises are already established; the machinery is installed and the management is appointed. However, if the franchise was not successful in the past, the new owner may have to make strict amends to revive it.

Single Unit Franchise
As evident from the name, the franchisee only owns one unit of the franchise. Single unit franchises are very common among new franchise owners who have just started in the business or are yet to start and do not have enough experience in this line of business.

A single unit franchise enables the owner to concentrate on managing only one unit at a time. Also, such franchise units are good low cost start-up opportunities.

Multiple Unit Franchise
Most franchise owners who have been in the business for a few years and have been running a successful franchise, invest their earnings to buy more franchise units of the same franchisor at different locations. Called sequential franchising, this is an ideal situation for a franchisee who wants to reinvest and expand profit margins.

Multiple unit franchises help cover a larger market. But, the franchisee must have a trusted management to keep a check on each franchise's performance. This type of franchise business is often observed in the hotel industry.

Area Developer Franchise
An area developer franchise is a form of multiple unit franchise, however, it is concentrated on building a solid customer base in a particular region by opening up franchises at different locations in the same area.

Such a franchise helps the franchisor to cover a large area, while the area developer divides it in sub-franchisees and distributes units among other franchisees. However, these outlets must be outsourced to franchisors within a specific span of time as mentioned in the franchising agreement.

Master Franchise
To own a master franchise, you must have a strong financial backing as it requires huge investments. The owner of a master franchise acts like a mediator between the franchisor and a number of franchisees and performs all the functions of a franchisor.

He pays a huge sum to the franchisor to buy the rights to collect royalty fee from the franchisees. He may also provide technical support to set up the unit to the franchisees under him, just like the franchisor. Master franchising is often called sub-franchising.

These are mostly white-collar based franchise's that are common in service industries such as financial consulting services (tax preparation, cost and wealth management), project management and stress management.

This is another type of franchise business that has no obligation of hiring employees and has flexible working hours. You may choose to do the work yourself. Cleaning services, repair services and security solutions are common examples of running a single operator franchise.

The work may be managerial or blue-collared services. It mostly requires you to supply and deliver products along with additional services and also needs you to be easily able to commute when the business demands. You can later expand such a franchise business.

You may have visited a departmental store that is run by the owners themselves. The customers walk-in and make purchases. The business is retail-based and entails selling products and services. The business should be located in a commercial place that has a lot of walking customers and busy roads that enjoy a lot of moving traffic.

The business hours are fixed as per the opening and closing time of the retail business. A retail franchisee may also hire additional staff for support. Excellent customer service is vital to the success of the franchise. Prior experience in the retail industry is an added benefit.

Management franchises or Business-to-Business franchises are mostly office based and require the franchisee to work closely with several other businesses and organizations. You must have a team of management professionals while being competent for the same.

Management franchises require teamwork and expect great leadership qualities from the franchisor to drive the growth of the business. You must have an ability to generate and maintain a solid customer base. Such a franchise option is common in marketing solutions-based businesses.

A successful franchise business makes money depending on the 4 factors; a right business model, at the right place, at the right time with the right product. Before you decide to take up a franchise unit from a franchisor, do consult your lawyer and accountant to ensure that the franchise business type suits your managerial and financial competence.

You could also take up a franchise unit in partnership with others if investing alone in a franchise unit is not an affordable option for you. Choose the right franchise business and see your investments multiply.