Types of Franchise Models Explained

Editor’s Note: This post was originally published in July 2025 and has been updated for accuracy and comprehensiveness.

Every year, thousands of entrepreneurs face the same decision: build a brand from scratch or plug into one that already works. Franchising gives you the second option, and understanding which franchise model fits your goals is the first step toward making it work.

At HigherVisibility, we’ve helped franchise brands across dozens of industries build marketing systems that scale with their growth. That experience has shown us that choosing the right franchise model shapes everything from your marketing budget to your long-term profitability.

In a franchise arrangement, one business (the franchisor) gives another company (the franchisee) a license to sell products and services under the franchisor’s brand name.

In some models, the franchisee owns the business unit, which allows them to exercise control over its operations and financial investments.

But in most cases, the franchisor provides the franchisee with a range of resources, like access to their operational processes, proprietary knowledge, franchise marketing support, and trademarks.

In the US, the franchise business is overseen and regulated by the Federal Trade Commission (FTC). By the FTC rules, every franchisor must prepare a Franchise Disclosure Document (FDD) that provides detailed information about the:

• Business model,
• Fees,
• Renewal and termination terms, and
• Dispute resolution procedures.

The FDD also contains information on other affiliate franchisees and how much they’ve made or are projected to make within a specific period. This is called “Item 19.”

It provides key details such as the average revenue, gross margins, and net profits from existing franchise locations (if the franchisor chooses to disclose it). You also get to know if the franchisor has had any litigations with the associate franchisees.

With this information, you can evaluate a brand’s track record and marketing position before committing, and:

• Predict the average volume of sales in a financial year.
• Identify the top-performing franchisees and what contributes to their success.
• Compare earning potential across different locations.
• Understand the startup costs and how long it takes to become a profitable enterprise.

In return for these benefits, the franchisee pays ongoing royalty fees to the franchisor.

Different Types of Franchise Models

Although all franchise arrangements have the same foundational franchisor-franchisee relationship, several franchise models cater to different business needs and preferences.

Model	Ownership Structure	Operational Control	Capital Requirements	Best-For Industries	Key Examples
Business-Format	Franchisee owns unit	Franchisor sets all systems	High (initial fee + royalties + ad fees)	Fast food, fitness, retail	McDonald’s, Subway, 7-Eleven
Product Distribution	Franchisee owns unit	Franchisee controls distribution	Moderate (licensing + inventory)	Consumer goods, automotive, electronics	Coca-Cola, Goodyear
Manufacturing	Franchisee manufactures	Franchisor sets production standards	High (equipment + raw materials)	Food and beverage, pharmaceuticals	Coca-Cola bottling partners
Conversion	Existing business converts	Shared (franchisor standards + local autonomy)	Low to moderate (conversion fees)	Hotels, medical clinics, home services	Marriott
Master Franchise	Master franchisee recruits sub-franchisees	Master franchisee manages territory	High (territory rights fee)	Fitness, restaurants, automotive	Regional territory operators
Investment	Investor owns, management team operates	Hired management team	Very high (capital investment + staffing)	Hospitality, fitness, real estate	Hotel chains, fitness centers
Hybrid	Varies by combination	Varies by combination	Varies	Automotive, QSR, health and wellness	Wendy’s/Reef Technology ghost kitchens

1. Business-Format Franchise Model

The business-format model replicates the franchisor’s business concept across all franchise units (locations). This includes its operational processes, support, marketing plans, and training programs.

Franchisors don’t just give franchisees the right to sell products and services under the franchise brand name. They also provide comprehensive guidance and ongoing support for setting up and operating their business.

The franchisor develops a standardized system that all franchisees must follow. This system covers everything required to kick-start operations in the new company, including equipment procurement, staff training and recruitment, standard operating procedures, customer service protocols, and sales and marketing strategies.

Under the business-format model, franchisees pay an initial fee to join the franchise network in addition to recurring royalty fees based on a percentage of revenue. Sometimes, franchisees will also pay marketing and advertising fees. McDonald’s, Subway, and 7-Eleven are classic examples of this franchise model.

In our experience working with business-format franchisees, the biggest marketing challenge is balancing national brand consistency with the local-level campaigns that actually drive foot traffic to individual units.

Pros:

• access to a proven business system and operational manual
• less risk and higher success rate
• ability to leverage a well-known, trusted brand to streamline marketing efforts
• easy access to capital for franchisors

Cons:

• high starting costs for the franchisee (it costs between $522,500 to $2.64 million to get a McDonald’s restaurant up and running)
• franchisees pay ongoing royalty fees from their profits
• franchisees are limited to the franchisor’s mode of operation

Best for: The business-format franchise model is popular in the fast food, fitness, retail, restaurant, and home service industries.

2. Product Distribution Franchise Model

Under the product distribution franchise model, franchisors grant franchisees the right to sell their products, often within designated territories. It’s not as all-encompassing as the business-format franchise model.

In this model, franchisees can sell products under their own brand identity and have greater autonomy over their business operations. It’s similar to a conventional supplier-retailer relationship.

Unlike regular retail arrangements, the franchisee sells the franchisor’s products on an exclusive basis. The franchisee may also pay a licensing fee to use the franchisor’s trademarked goods or agree to minimum purchase requirements. Coca-Cola and Goodyear Tires are well-known examples of this model.

Franchisors focus on manufacturing the products, while franchisees handle the distribution and sales within their local markets. This can include responsibilities like warehousing, inventory management, product transportation, and customer relationship management.

There are three main types of product distribution franchise:

• Wholesaler-supplied: The wholesaler is the franchisor that sources and supplies the products to the franchisees.
• Manufacturer-supplied: The manufacturer is the main supplier of the products and delivers directly to the franchisees.
• Retailer-supplied: The franchisor is the retailer and sources, manages, and distributes the products to the franchisees.

Product distribution franchisees often invest more in local distribution channel visibility and less in brand awareness campaigns, since the franchisor’s brand already does the heavy lifting.

Pros:

• access to an established supply chain
• ability to purchase bulk products at a lower cost
• access to a proven inventory system
• low or no royalty payments (especially if the franchisor profits from product sales)
• more control over product quality for franchisees

Cons:

• high starting costs
• reliance on the franchisor’s supply chain
• limited product diversity

Best for: The product distribution model is popular in consumer goods, automotive, and electronics industries.

3. Manufacturing Franchise Model

The manufacturing franchise model is often confused with product distribution, but there’s a key difference: here, the franchisee actually produces the product rather than just distributing it. The franchisor grants exclusive rights to manufacture and distribute their products using established processes and intellectual property.

To ensure quality and consistency, franchisees must adhere to the franchisor’s guidelines when manufacturing products (like following recipes and using specific equipment).

The franchisors also provide ongoing support and training to ensure these operations run smoothly. This ensures that all products manufactured under the franchisor’s brand meet the same quality standards.

Consider Coca-Cola, for example. The company manufactures the syrup concentrate (coke extract) and distributes it to other bottling partners (franchisees). These bottling partners have the exclusive right to mix the concentrate with water and sweeteners, bottle it, and distribute it to retailers and consumers in their local market.

Franchisees are also responsible for supply chain management, including sourcing raw materials, coordinating production schedules, and ensuring products reach end-users in time.

Pros:

• consistent product quality in all locations
• efficient supply chain management through centralized manufacturing
• effective quality control for the franchisors
• easy to scale across multiple regions

Cons:

• Franchisees depend on franchisors for inventory, and any delay in the supply can affect the entire local process.
• Franchisors must ensure franchisees follow their quality control measures to maintain consistency.

Best for: This model is used across a range of industries, such as food and beverage, consumer goods, and pharmaceuticals.

4. Conversion Franchise Model

The conversion franchise model allows existing independent businesses operating within the same industry to join the franchise’s network.

When such businesses become franchisees, they adopt the franchisor’s brand identity, operational standards, and processes. Conversion franchisees often retain some degree of autonomy over day-to-day operations and marketing activities within their respective markets.

For the franchisor, it’s a fast route to expand their business network to other countries. It’s low cost, too. The incoming businesses would already have all the essentials (staff, a building, customer base, and, more importantly, industry experience). All that’s left is to align them with the franchise system, technology, and branding.

An excellent example of this is Marriott. Marriott International offers a wide range of hotel brands across various categories, including luxury and select-service options. The converted business (franchisee) will adopt Marriott’s global standards, operational procedures, and management expertise to grow its business.

Pros:

• less risky since the franchisors have a working business model
• ability to capitalize on the franchisor’s brand name for brand recognition and support
• access to a broad, international customer base
• a quick way to expand your business as a franchisor across different markets

Cons:

• Royalty fee payments after sales may affect the franchisee’s financials.
• Balancing the franchisor’s mode of operation with the local market can be challenging.

Best for: Established medical clinics, retail stores, and home service providers.

5. Master Franchise Model

The master franchise model enables franchisees to become “master franchisees” or sub-franchisors.

Here, the franchisee owns the rights to develop and manage sub-franchisees within a specific territory. This means the franchisee gets to create, manage, and sub-franchise multiple franchise units within a specific geographic territory.

Think of master franchisees as middlemen between the franchisor and individual unit franchisees. They’re responsible for overseeing and supporting the sub-franchisees within their designated area. This may include training and onboarding, recruitment, and supply chain management in their territory.

For instance, a franchisor can grant a master franchisee exclusive rights to the territory of New York. The master franchisee is then responsible for recruiting and supporting new franchisees within this area, and ensuring they’re on par with the brand guidelines.

In return, the master franchisees pay a fee to the parent franchisor for the rights to develop and manage sub-franchisees and receive royalties from those sub-franchisees.

Master franchisees we’ve worked with often face a unique marketing challenge: they need to recruit new franchisees to their territory while also supporting existing unit-level campaigns.

Pros:

• additional income streams for master franchisees through royalties from sub-franchisees
• a fast way for franchisors to expand into new markets, since master franchisees carry the majority of the operational burden

Cons:

• The multi-tiered system can become complicated if not properly managed.
• communication challenges between franchisors and master franchisees

Best for: Master franchisees are common in fitness, full-service restaurants, automotive, and health industries.

6. Investment Franchise Model

Under the investment franchise model, capital investors provide the necessary financial resources to set up or buy a franchise unit to make a return.

The franchisee owns the unit but does not engage in day-to-day operations like in other models. Instead, they hire a management team to manage the business.

In most cases, investment franchisees are corporate investors or high-net-worth individuals with a strong track record in business (it can be related or different). They view franchising as a way to diversify their portfolio, so they don’t get involved with its day-to-day operations.

In return for their financial investment, they receive a share of the profit generated by their franchise unit.

Pros:

• long-term return on investment, especially in high-demand sectors such as hospitality or fitness
• ability to open multiple units for greater market presence
• access to brand recognition, a proven business system, and franchisor support
• for franchisors, investment franchisees bring capital, business experience, and management infrastructure

Cons:

• high capital requirements for franchisee fees, construction, and staffing
• reliance on a hired management team, where poor hires can lead to underperformance or reputational damage

Best for: Some common examples of investment franchises include fitness centers, hotel chains, and real estate brokerages.

7. Hybrid Franchise Models

Hybrid franchise models combine elements from different models to create a unique and flexible business structure. These can be business format franchise models combined with the product distribution franchise model, or franchising paired with other business strategies like licensing or partnerships.

Hybrid franchise models let franchisees draw on multiple operational frameworks, combining standardized systems with distribution autonomy or licensing flexibility. They do require careful planning and management to work smoothly.

Pros:

• customizability, letting you combine aspects of different franchise types to suit your business or region
• flexibility and autonomy for franchisees who want creative control
• shared responsibilities between franchisor and franchisee based on their strong suits

Cons:

• too much flexibility can lead to inconsistencies in brand perception
• detailed planning requirements that can be complex to implement

Examples of Hybrid Franchise Models

Examples of hybrid franchise models include:

• Business Format + Product Distribution: This model combines the comprehensive support and guidance of a business format franchise model with the efficiency of a product distribution franchise model. Franchisees benefit from a standardized system while managing product distribution and sales.
• Franchise Owned Company Operated + Company Owned Franchise Operated: This model merges the autonomy of a franchise-owned company-operated model with the support and guidance of a company-owned franchise-operated model. Franchisees own the units, but the franchisor handles day-to-day operations to ensure brand consistency and business efficiency.
• Hybrid Franchise + Licensing: This model combines the flexibility of a hybrid franchise model with the simplicity of a licensing agreement. Franchisees operate under the franchisor’s brand and business model while leveraging licensing agreements to expand their product or service offerings.
• Investment Franchise + Ghost Kitchen: The investment franchise model and ghost kitchen are most popular in the Quick Service Restaurant (QSR) space. In this model, the capital investors fund the delivery-only virtual restaurants (or ghost kitchens). At the same time, a third party (or even the franchisor in some cases) manages the operations using the brand menu and technology stack. This hybrid model is cost-effective as it eliminates the need to build or purchase a building from scratch. Your management team can also focus on profit-maximizing activities rather than operational ones, such as in-store customer service or staff management.

Wendy’s Kitchen’s partnership with Reef Technology is a good example of this model. Reef funds and operates ghost kitchen pods that serve Wendy’s menu through delivery apps.

Best for: Automotive services, furniture retailers, and health and wellness brands.

Franchise Unit Ownership Models

1. Company-Owned, Company-Operated (COCO)

Under this model, the franchisor directly owns and operates its outlets. Technically, this doesn’t count as a franchise model since no independent franchisees are involved.

Typically, franchisors use the COCO model as a testing ground for their business concept and to iron out best practices. If the business proves viable, they can begin searching for franchising opportunities.

2. Company-Owned, Franchise-Operated (COFO)

The COFO model is a more collaborative approach to franchising where the franchisor maintains ownership of franchise units but delegates day-to-day operations to a franchisee.

In this case, franchisors are still responsible for providing franchisees with guidelines, training, and support, while franchisees handle routine functions like staffing, inventory management, and customer service.

3. Franchise-Owned, Franchise-Operated (FOFO)

This is the most common form of franchising, where the franchisee owns and operates individual franchise units under the franchisor’s brand name. While franchisees retain control over business operations (like staffing, inventory management, and local marketing efforts), they also must follow the franchisor’s guidelines and brand standards to ensure consistency.

4. Franchise-Owned, Company-Operated (FOCO)

Finally, under the FOCO model, franchisees own the units, but day-to-day operations fall into the franchisor’s hands. This approach is often adopted by franchisors who want to maintain complete control over their brand image, operational consistency, and customer experience.

How to Choose the Right Franchise Model

1. Evaluate Your Skills and Strengths

Evaluate yourself based on your skills, interests, and capacity. Do you enjoy managing people and thrive in a fast-paced environment? Do you prefer flexibility, or are you more comfortable with a structured system? A thorough self-assessment will help you choose the model that works for you and the industry you should venture into.

Tip: Use SWOT analysis to identify your strengths, weaknesses, threats, and opportunities. Envision your growth plan in the next three to five years, too.

The more honest and specific you are at the evaluation stage, the easier it is to filter through the noise and find a franchise opportunity that matches your goals.

2. Define Your Business Goals and How Franchising Would Help You Achieve Them

Next, you want to define your business goals and how franchising fits your long-term vision. Goal setting will set you off on the right foot and help you know which path is best for your business success.

For example, as a potential franchisee, your goal might be to gain market entry fast and start making a profit. So, you’ll want a franchise model like a business format franchise that has low entry barriers, strong brand recognition, and proven systems in place.

If you’re an intending franchisor, your goal might be to expand your footprint to other locations without overbearing the operational load of each unit.

Once this is all panned out, you’d make informed decisions on the best models that align with your growth strategy, budget, and operational system.

3. Evaluate Your Business to Determine the Capacity

Each business has its demands in terms of capital, operational systems, staffing, and customer service expectations. Before you settle on any model, evaluate your current capacity to determine whether you can realistically support or scale.

Here’s the truth: Although franchising is profitable, you can’t predict how fast or slow your growth will be, especially if you partner with a busy or expensive franchisor.

Case in point, this business owner on Reddit shared how they lost thousands of dollars and had to close their franchise only a few months in. The reason? High franchise and royalty fees, unpredictable sales, and rigid legal agreements.

Before committing, ask yourself:

• Can I afford the initial franchise fees and operational expenses?
• Do I have the tools and people to maintain quality standards?
• Is there a high demand for the franchisor’s products in my location?

As a franchisor, you also want to know if you can replicate your systems across the new locations.

4. Find the Model That Best Aligns With Your Business Goals

Once you’re certain of your business goals and capacity, the next thing on the list is to choose the one that aligns accordingly. The last thing you want is to commit to a franchise model that constrains your growth plan or drains your resources.

There are different types of franchise models as listed above, with their strengths and tradeoffs. Go through each option again to know which one aligns with your vision.

5. Choose the Location Carefully

Your franchise location is one of the most important determinants of its success. Urban areas and cities are often attractive due to their high population density, better infrastructure, and great foot traffic. These benefits come at high operational costs and dense competition, though.

To choose your location, consider where your target customers are. For instance, a QSR will thrive near offices or universities, while a home service franchise will thrive in residential areas.

We’ve seen franchisees succeed fastest when they pair location data with local search demand analysis, identifying territories where organic search volume for their category is high but competitor saturation is low.

Conduct location feasibility studies or work with a franchise expert who can recommend strategic territories based on market data, customer demographics, and competition levels.

6. Run Your Decisions Through a Professional

Franchising is capital-intensive, and you can’t afford to take the wrong step, especially at the foundational stages. To avoid costly mistakes, consult a franchise expert before signing any agreements. These experts can help you:

• Review the Franchise Disclosure Document to ensure transparency in fees, obligations, and restrictions.
• Evaluate the financial projections and determine if the model is viable based on your current resources.
• Assess legal risks and negotiate terms that better protect your interests.
• Conduct due diligence on the franchisor’s reputation, history, and franchisee success rate.

Read more on how to choose the right franchise models.

Frequently Asked Questions About Franchise Models

What Does a Franchise Model Mean?

A franchise model is a business arrangement where a company (the franchisor) licenses its brand, systems, and operational processes to an independent operator (the franchisee). The franchisee pays fees in exchange for the right to operate under the franchisor’s name and use their proven business methods.

What Are the Four Types of Franchises?

The four most commonly referenced franchise types are business-format, product distribution, manufacturing, and conversion. That said, franchising has evolved to include several other models like master franchises, investment franchises, and hybrid approaches.

What Is a Franchise Model Example?

McDonald’s is one of the most recognized franchise examples. It uses the business-format model, where franchisees pay an initial fee and ongoing royalties to operate a restaurant using McDonald’s branding, menu, operational systems, and marketing support.

Is Starbucks a Franchise Model?

Starbucks primarily operates company-owned stores in the United States, making it a COCO (company-owned, company-operated) model. Internationally, Starbucks does use licensed store agreements with regional partners, but these are licensing arrangements rather than traditional franchise models.

What Is the Difference Between a Franchise and a License?

A franchise involves a comprehensive business relationship where the franchisor provides operational systems, training, marketing, and ongoing support. A licensing agreement is simpler: the licensor grants the right to use intellectual property (like a brand name or product formula) in exchange for a fee, but doesn’t dictate how the licensee runs their business.

Final Thoughts

Choosing the right franchise model comes down to your goals, your capital, and how involved you want to be in daily operations. No matter which model fits, you’ll need to develop and implement a strong marketing strategy to convert your franchise’s potential into measurable growth. We can help you create winning franchise campaigns to boost your organic traffic, leads, and sales.

Request a Proposal to get a custom strategy tailored to your franchise model.