What’s in a name? Well, in the world of franchising, pretty much everything! Virtually every item with which we interact in our modern lives, in the products and services we use towards the food and drinks we consume, is associated with a franchise — most of them big names. And it’s not only our cars, clothes, and food. Think about it: there’s a strong possibility that even the tree growing in your yard was planted and trimmed by a tree care franchise.
Wait, you may ask. What about mom-and-pop businesses?
There continue to be plenty of mom and pop businesses around, but even those companies are often involved with franchising for the use brand-name products. For example, a mom-and-pop convenience store sell a branded product, for example name-brand fried chicken, or they may have a Redbox vending machine. And people are just a couple examples of the different methods for you to own a franchise.
If you’re running a business or an aspiring entrepreneur, you may be wondering how — or even if — you can leverage a product to your advantage. Well, as long as you possess the capital, expertise, and dedication, you most certainly can! Based on your industry experience and investment level, you are able to own 1 of 3 kinds of franchises, which I’ll discuss in this article in further detail.
Quick Guide: Kinds of Franchises
- Business Format Franchises: The most common type of franchise. The franchisee not only sells a particular product, but additionally produces and offers the product or service depending on the franchisor’s proprietary ingredients and/or practices, along with the franchisor’s assistance. Examples: Subway (fast food chain), Marriott (hotel chain), Hertz (car rental company), Nike (retail outlet), The UPS Store (mailing and shipping outlet), Great Clips (haircut salon).
- Manufacturing Franchises: The franchisee buys the license to make a branded product, or part of an item, in accordance with the franchisor’s practices and standards. The merchandise will be further assembled and/or given to consumers via downstream channels. Common examples include automotive manufacturers (Hyundai) and beverage manufacturers (Coca Cola).
- Product Franchises: The franchisee buys the rights to market a certain product in their own establishment, in exchange for paying the franchisor a royalty fee and/or with certain limitations. The limitation may be the store must sell the franchisors’ products exclusively (however this is not always the case). Common examples include gas stations (Exxon), vending machines (Coca Cola), and dealerships (Ford Motor Company).
Business Format Franchises
A business format franchise is easily the most everyday sort of franchise. A business format franchise produces and delivers not only a service or product, but additionally a person experience, all in accordance with the franchisor’s specific standards. In return for a one-time franchise fee and ongoing royalty fees, the franchisee also receives assistance from the franchisor when it comes to training, marketing, quality control systems, and other aspects of running the company. Business format franchises dominate many industries, from junk food, to retail, to hospitality, together with many others. Some popular examples include McDonald’s, H&R Block, Starbucks, Jamba Juice, Hilton Hotels, and 7-Eleven.
Usually, it is not obvious towards the consumer whether a chain establishment is company-owned or franchised because the consumer experience varies minimally or not-at-all in one location to the following, nor does it vary significantly based on whether you’re in a company-owned vs. franchised establishment. For example, fast-casual eatery Smashburger has some corporate-owned locations and some franchise-owned locations, but they all operate virtually exactly the same.
Business format franchises vary significantly in just how much they cost to spread out and operate. It might be easy to open a home-based franchise such as a travel agent franchise just for a few thousand dollars; in the opposite end from the spectrum, opening a well known restaurant franchise can set you back several million dollars. Business format franchisees become franchise owners either by creating a new franchise location from scratch, or sometimes by purchasing an existing franchise location. Some franchisors require prospective franchisees to agree to develop multiple franchise locations inside a certain timeframe.
Pros & Cons Of Business Format Franchise
The Pros:
- You possess a certain degree of autonomy, as you buy and operate your personal business.
- You possess a built-in base of customers who're already love your products.
- You possess the security of a proven business design.
- You receive corporate guidance, training, and marketing.
The Cons:
- You have little say in the way you run your business—where you purchase raw materials, how you deliver the product/service, which business management software you utilize, etc.
- The franchise fee along with other costs to do business could be prohibitively expensive, with no way to control these costs, that are based on the franchisor.
- The profit margin is narrow (when compared with running your personal business), due to high operating costs and franchise fees.
Is A company Format Franchise Best for you?
The ideal candidate for any business format franchise has the following characteristics:
- You don’t necessarily have specific skill-set but wish to buy and operate your own business.
- You have or can access the capital necessary to spend the money for franchise fee and other startup costs.
- You don’t mind following corporate practices/instructions to some tee.
- You are prepared to forfeit part of your profit in exchange for corporate guidance and also the safety of a proven business model.
Manufacturing Franchises
A manufacturing franchise is a manufacturing company that creates the raw or end product that a franchisor ultimately sells. Sometimes, these operations are also called “suppliers” or “partners.” They are usually located in countries away from U.S. where the cost of production is cheaper. Some examples include automobile and automotive parts manufacturers, computer manufacturers, clothing manufacturers, and food and beverage manufacturers. Not all consumer product use manufacturing franchises; some trademarked products are made by company-owned facilities.
Coca Cola is definitely an example of a business that partners with manufacturing franchises to manufacture the syrup that goes into their soft drinks. The syrup will be sold to some bottling company that adds water and carbonation, and then bottles and distributes the drinks.
Manufacturing franchises be forced to pay the franchisor a charge set for the license to create the recycleables or end product with the company’s trademarked name. The product must be manufactured within strict specifications so that it meets the franchisor’s quality standards and it is indistinguishable in the products made by the company’s other manufacturers. They are significant operations and wish not just owning the way to production, but also experience, expertise, and a lot of legal help to ensure that all relevant laws and coverage is being adhered to.
Pros & Cons Of A Manufacturing Franchise
The Pros:
- With an efficient production system, you can potentially make a substantial amount of money.
- You could have a specific amount of autonomy as to how you run your operations, as long as you produce the product towards the franchisor’s specifications.
- You do not have to be worried about sales, marketing, or any other customer-facing aspect of the business.
The Cons:
- Startup and overhead costs are generally substantial.
- Fluctuations in raw material and energy costs can reduce into your profit margin.
- You have to meet numerous strict codes and specifications, adhering to the company’s policies and all relevant laws.
Is A Manufacturing Franchise Right For You?
You might think about a manufacturing franchise should you fit the next profile:
- You already own manufacturing facilities and have the capital to acquire or build them.
- You have experience mass-producing products for other franchisors or can partner with somebody who has this experience.
- Your operations meet or can meet all a franchisor’s supplier requirements; for example, listed here are the requirements to become a Coca Cola supplier.
Product Franchises
A product franchise, also sometimes called a “product distributor” franchise, is a business design where a company agrees to market a trademarked product, either exclusively or not. A few examples include dealerships, auto parts suppliers, tire stores, and convenience store inventory. The car dealership may sell a franchisor’s product exclusively, while a convenience store may agree to buy a certain quantity of units, or accept sell the franchisor’s products to the exclusion of certain competing products. Vending machines can also be considered a kind of product franchise. Many gasoline stations, including Exxon, follow a product franchise model as well.
Depending on the agreement, the franchisee might have to pay fees towards the franchisor to buy the license to sell the trademarked product.
With a product franchise, the product itself is the only real aspect of the business distributed per the franchisor’s terms. The customer experience can differ so much from one business to the next, because the distributor (franchisee) maintains treatments for most facets of their business, and also the franchisor does not offer any assistance when it comes to sales processes, employee training, etc.
Pros & Cons Of A Product Franchise
The Pros:
- You benefit from the reputation of name-brand product, without needing to produce it.
- You have not many upfront costs, apart from the cost to purchase the wholesale products in the franchisor.
- You have the flexibility to operate your company how you see fit.
The Cons:
- You could find yourself tied to the surplus of an unpopular product, possibly forcing you to sell the merchandise at a loss.
- You receive no or minimal support/assistance from the franchisor.
- You have to own your storefront where one can distribute the merchandise.
Is A Product Franchise Best for you?
You may be the ideal candidate for a product franchise if you have the following attributes:
- You already own your personal sales channel (usually a storefront establishment but could likewise incorporate eCommerce) or can connect to the capital to do this.
- Your customers request a certain (franchised) product, or you have reason to think your visitors would buy said product.
- You want to maintain charge of your personal business without needing to cope with franchisor oversight.
Final Thoughts
There are three main kinds of franchising relationships, because both versions represents another segment of a franchised company’s logistics. Depending on factors like the level of control you want over your business, your business experience/skill-set, and also the amount of capital you have access to, you may choose to open a business format franchise, product franchise, or a manufacturing franchise. Or, you might just opt into business on your own! For more information on franchise ownership, check out some more franchise resources we’ve come up with for you personally:
- The Step-By-Step Help guide to Buying A Franchise
- Franchise Financing: The 7 The best places to Get A Franchise Loan
- How Franchises Work: The entire Guide For Entrepreneurs
