Types of Franchise and their Advantages & Disadvantages
Franchising is one of the easiest and most flexible methods to grow your business and enhance its brand reputation internationally. However, people who are starting a business often suffer from a dilemma regarding choosing the right kind of franchise that fits their business needs and expectations. Thus, knowing the types of franchises can be essential here.
Are you wondering what kind of franchise will be suitable for you? Then, keep reading this article to get a comprehensive overview.
What Is a Franchise?
With a franchise business, you get to sell an established company's products, maintaining the company's trademark and intellectual property rights. The work pressure is low, as you do not have to manufacture your own products. The franchisor allows you to sell their products and use their intellectual properties in exchange for a royalty.
With such a business, you can generate a good profit, as you are selling the products of an existing company with a loyal customer base. However, you need to pay a part of the profit to the franchisor as compensation for using their intellectual property rights. Moreover, it is a way of growing a business faster and earning a good profit margin.
What Are the Different Types of Franchises?
Starting a business is always scary, as its growth and success are primarily unpredictable. However, at the same time, it is the best professional choice for tremendous profitability. Here, a franchise can be the answer to your uncertainties. It is a simple and effective method of starting a new business. Here is a list of the different types of franchise to give you a better idea.
1. Product Franchising
As the name suggests, such franchises are product-driven and depend on a supplier-dealer relationship. Here, the franchisee distributes the trademarked products of the parent company. However, the franchisee cannot access the entire system, as the franchisor licence its brand name.
Large product dealers dealing with car spare parts, appliances, computers, vending machines, etc., typically use this franchise.
General Motors, Coca-Cola, Pepsi, Exxon, etc.
- This franchise business does not require you to manufacture new products.
- Logistics and processes are usually in place.
- Cash flow is easier and faster as you use trademarked products of an existing company.
- Such franchising represents the highest percentage of total retail sales.
- Financing can be easier with this kind of franchising.
- You will not get any credit for the hard work, as the products are under the company’s trademark.
- There is little room for creativity, as the products are fixed and pre-decided.
- You might get into serious conflicts with the franchisor’s product ideas.
- There will be a lack of financial privacy.
2. Business-format Franchising
This type of franchise is also similar to a product franchise system. However, in a business-format franchise, the franchisee gets access to operate the entire business and market and not just the products. Here, the franchisee has the right to work with the franchisor's accounting, operations, quality control, promotions and training. It is one of the most popular franchise ideas.
This kind of franchise is mostly seen in fast food, retailing, business services, gym and fitness, restaurants, etc.
Motel 6, Subway, RE/MAX, UPS Store, McDonald's, KFC, Chick-Fil-A, Gold’s Gym, Planet Fitness, Bath & Body Works, etc.
- This type of franchise maintains low operational costs keeping local standards in mind.
- You can quickly expand with such a business.
- There are lower risks as the business is already established.
- You can increase your business knowledge from the franchisor.
- The franchisor can also help you with training and development.
- There is a lack of independence for the franchisee.
- The franchisee might suffer negative publicity if the parent company fails to perform.
- The franchisee will have a long-term commitment based on the closing period.
This is a home-based franchise business for people who are looking for a low-investment venture. Here, a single person can be the franchisee, handling the products or providing a service under a specific industry. Purchasing a minimal range of equipment and maintaining a limited stock can be sufficient for this type of franchise. Thus, paying a basic franchisee fee can be helpful for this franchise.
Travel agencies, garden care, drain cleaning, cell phone accessories, real estate services, shipping services, event planning, daycare, etc., are standard franchise products.
- You can start this business with a small investment and human resources.
- Any kind of product and service can be suitable for such a business.
- You get a ready-made business plan with such a franchise idea.
- There is no need for specific industry experience.
- There is less flexibility in terms of products and services.
- The fate of the business might be different from your expectation.
- There is limited potential for growth and development in such businesses.
4. Investment Franchise
Among different kinds of franchising businesses, this type refers to a large-scale franchising idea. Here the franchisee is a significant investor in the concerned company. The franchisee needs his/her own management team besides a large investment for maintaining the business. Such a franchise business aims to gain a significant return on investment within a short period.
Hotels and big restaurants mainly come under this kind of franchise.
Holiday Inn Express, Comfort Inn, Days Inn, Tim Hortons, Taco Bell, etc.
- This type of franchising business is effective for gaining quick profitability.
- You can count on these for a good return on investment.
- As an investor, you will have the independence to decide on the products and operations of the company.
- The investment amount is high for such a venture.
- The franchisee should have proper business knowledge and expertise.
- The failure of the parent business will be a significant financial loss for the franchisee.
5. Conversion Franchise
This kind of franchise business builds a modified relationship between the franchisor and the franchisee. Here, a franchisee enters into a relationship with an existing business instead of starting the venture from scratch. First, it turns the business into a franchise unit while adopting the company's trademark. Then, the franchise starts adopting marketing and promotions, advertisements, training and client service standards.
Franchisees, including real estate brokers, electricians, florists, plumbers, professional services, etc., mainly take an interest in this kind of franchise business.
Century 21, Ace Hardware, etc.
- There is lower risk as the franchisee is not starting the venture from scratch.
- You have a potential for faster growth and development in the concerned industry.
- This venture will also ensure higher profitability and bette r returns on investment.
- Finding such companies that allow this kind of franchise option might be challenging.
- There might be frequent disagreements and conflicts of opinion between the franchise and the parent company.
- There is a requirement for an extra effort to promote the company and improve its sales, unlike other franchise types.
- Choose an Office Space & Hire Employees
The final step is to choose an office space in a favourable location. The office space should be in tune with the business's specific requirements. Moreover, you need to hire your employees by posting vacancy advertisements in the location. You can also look for internal employees looking to relocate to your chosen location.
What Are the Advantages & Disadvantages of a Franchise Business?
As you can see, even the most popular franchises have their own advantages and disadvantages. So, if you are still contemplating your choice of building a franchise business, here are some of the advantages and disadvantages of a franchise business.
Advantages of Franchise
- A franchisee does not require specific business knowledge or experience. However, he/she can receive business assistance from the franchisor.
- Franchise business ensures quick success and brand recognition. A franchisee is starting a business under the name of an existing company, which helps to develop a strong brand image.
- There are lower risks and failure possibilities with a franchise than with a regular business, as it is under the trademark of a famous brand.
- Profitability growth is also quick and immense. As a result, such business ventures will have better cash flow and revenue.
- The customer base is already built for an existing company. As a result, no extra effort is required to build a new target market from scratch.
- There is more independence in starting a franchise business than working for a large brand.
Disadvantages of Franchise
- There are often high regulations because the franchisee needs to abide by the initial rules and policies of the parent company. This brings various forms of operational restrictions.
- While the initial cost might be affordable, the maintenance cost of such a venture might be high. As a result, it can be difficult for some people to afford it.
- There are high chances of disagreements and conflicts between the franchisee with the parent company, which can be difficult to address.
- Franchisees might face a lack of financial privacy. This is because they need to share their financial details with the franchisor.
- There is limited creativity in a franchise business. Franchisees hardly have the liberty to design new strategies.
- Any mistakes or failures of the parent company will negatively affect a franchise business and its reputation, affecting sales.