Types of Franchise Models Explained
Seasoned business owners and budding entrepreneurs have been attracted to the franchise business model for centuries.
As a franchisor, the model lets you grow your business through partnerships with other entrepreneurs and extend your brand’s reach to new locations. And as a franchisee, it gives you a ready-made framework for launching a business with a greater chance of success than starting with a blank slate.
But if you’re new to the world of franchising, the whole concept can seem a little confusing. Franchising is used by a variety of business types across a range of industries, and there are several ways to structure a franchise business.
Our goal in this post is to help you understand the most common types of franchise models. Knowing how they differ will help you pinpoint the kind of model that will work best for your particular business needs and objectives.
So let’s start with the fundamentals.
Franchising is when one business (the franchisor) gives another business (the franchisee) a license to sell products and services under the franchisor’s brand name.
Typically, the franchisor provides the franchisee with a range of resources, like access to their operational processes, proprietary knowledge, franchise marketing support, and trademarks.
In return for these benefits, the franchisee pays ongoing royalty fees to the franchisor.
Although all franchise arrangements rest on the same foundational franchisor-franchisee relationship, several franchise models are available that cater to different business needs and preferences.
Here are some of the most popular franchise model variations out there.
The business-format franchise model is by far the most common and is usually what comes to mind when thinking about franchising.
This model replicates the franchisor’s entire business concept across all franchise units (locations).
Not only do franchisors give franchisees the right to sell products and services under the franchise brand name, but they also give them comprehensive guidance and ongoing support for setting up and operating their business.
In other words, the franchisor develops a standardized system that all franchisees must follow. This system covers everything from equipment procurement, staff training and recruitment, standard operating procedures, customer service protocols, and sales and marketing strategies.
Under this model, franchisees typically 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.
The business-format franchise model is particularly popular within the fast food, fitness, retail, restaurant, and business services industries. McDonald’s is probably the most iconic example of a business using this model.
Under the product distribution franchise model, franchisors grant franchisees the right to sell their products, often within designated territories.
This model is less all-encompassing than the business-format model. Franchisees sell products under their own brand identity and have greater autonomy over their business operations.
The product distribution model has a lot in common with a conventional supplier-retailer relationship. One difference is that the franchisee typically sells the franchisor’s products on an exclusive basis. Another difference is that franchisees either pay a fee to sell the franchisor’s trademarked goods or agree to minimum purchase requirements.
In essence, 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.
The product distribution model is popular in several industries, including consumer goods, automotive, and electronics. Coca-Cola is a well-known example of a company using this model.
Under this model, franchisors grant franchisees exclusive rights to manufacture and distribute their products using the franchisor’s established processes and intellectual property.
This means franchisees must adhere to the franchisor’s set guidelines when manufacturing products (like following recipes and using specific equipment) to ensure quality and consistency.
Franchisees are also responsible for supply chain management, including sourcing raw materials, coordinating production schedules, and ensuring products reach end-users in time. Typically, franchisors will provide ongoing support and training to ensure these operations run smoothly.
This model is used across a range of industries, such as food and beverage, consumer goods, and pharmaceuticals. Subway is a notable example of a company that uses the manufacturing franchise model.
The conversion franchise model allows existing independent businesses operating within the same industry as a franchise to join the franchise’s network.
When such businesses become franchisees, they typically adopt the franchisor’s brand identity, operational standards, and processes. However, conversion franchisees often retain some degree of autonomy over day-to-day operations and marketing activities within their respective markets.
Common examples of businesses using this model include established medical clinics, retail stores, and home service providers.
The model enables franchisees to become “master franchisees” or sub-franchisors.
Essentially, this means the franchisee gets to develop, manage, and sub-franchise multiple units of the franchise within a specific geographic territory.
Acting as middlemen for the franchise company, master franchisees provide oversight and support to the sub-franchisees within their designated area. This may include responsibilities like training and onboarding, recruitment, and supply chain management.
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.
Under the investment franchise model, capital investors provide the necessary financial resources to set up or buy a franchise unit with the goal of making a return.
These franchisees are typically corporate investors with a proven track record within the relevant industry. They don’t usually contribute to the franchise’s day-to-day operations or strategic planning, leaving such responsibilities to the franchisor or a dedicated management team.
In return for their financial investment, franchisees receive a share of the profit generated by their franchise unit.
Some common examples of investment franchises include fitness centers, hotel chains, and real estate brokerages.
Now that we’ve covered the most prevalent franchise business models, let’s quickly address the four kinds of franchise ownership structures.
Under this model, the franchisor directly owns and operates their 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.
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.
Franchisors are still responsible for providing franchisees with guidelines, training, and support, while franchisees handle routine functions like staffing, inventory management, and customer service.
This is the most common form of franchising, where franchisees both own and operate individual franchise units under the franchisor’s brand name.
While franchisees retain significant 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.
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.
Franchising is a proven avenue for businesses looking to expand their customer reach, all while enjoying the benefits of increased brand recognition and the efficiency of standardized operational processes.
As we’ve seen, there are several ways to structure a franchise, with each model catering to different business needs and preferences.
But remember, whichever franchise model works best for you, you also need to develop and implement a coherent marketing strategy to ensure your business grows. Whether you’re an established or aspiring franchisor or franchisee, we can help you develop winning franchise SEO campaigns to boost your organic traffic, leads, and sales.