The 5 basic types of franchises

Published on Oct 18, 2022

The 5 basic types of franchises

Buying a franchise is a great investment for entrepreneurs looking for a proven business model where the operations are turnkey and the brand recognition and internal processes are built in. If you’re looking to buy a franchise, it’s important to know which model you’d like to adopt and which industry you’d like to engage with.

Franchises are categorized by type, with each type encompassing several different industries. We’ve outlined the five basic types of franchises to help you determine which model best suits your needs.

Job Franchise

A job franchise is a franchise concept rooted in service industries that requires a low investment. This franchise model can involve the franchisee or a small staff performing the work that provides the service to customers. Examples of this franchise model generally include a form of trade or selling products and/or services like commercial cleaning, event planning, lawn care and landscaping and travel agencies. This franchise model typically requires a small franchise fee and a nominal startup cost for inventory, supplies, equipment, and in some cases, vehicles. 

Product Franchise

Product or distribution franchises are very common, making up the highest percentage of total retail sales in the United States. This type of franchise distributes the products of the franchisor, which are usually large and/or expensive products. The franchisor allows the use of its trademarks but normally doesn’t provide operational support to run the business. There is usually a significant investment cost associated with acquiring a product franchise. Examples of product franchises include new car and boat dealerships, tractor sales and heavy equipment distributors, beer distributors, and local bottling companies like Coca-Cola and Pepsi.

Business Format Franchise

Business format franchises are by far the most notable franchise concept and are often the model that most people are familiar with.  In this model, the franchisee receives the entire business model, marketing strategies, ongoing training, and operational support in addition to having the ability to use the brand’s name and distribute its products. Restaurants account for much of the business format franchise space, but there are many other industries in this category as well including family entertainment centers, fitness centers, and retail stores.

Investment Franchise

Investment franchises are businesses that require a high upfront investment and have a large project budget. The high costs usually attracts high net worth investors or investor groups that bring capital and often their own management team to the business. These investors are mainly interested in the return on investment and are typically not engaged in the daily operations of the business. Large flagship hotels are a prime example of franchises in this space.

Conversion Franchise

A conversion franchise is an existing business that signs a franchise agreement to convert the business to a franchise brand and operational system. Business owners do this to achieve better brand recognition and purchasing power, the ability to reach new markets and customers, to receive strong operational procedures and ongoing training and obtain higher resale value.  Whatever the reason, the business owner made the determination it was more advantageous to become part of a franchise than to stay independent.  Examples of conversion franchises exist in real estate agencies, financial planning firms, independent hardware stores, and other service-based industries.     

With years of experience financing the entrepreneurial dream of owning your own business, Valley Bank’s Small Business Administration (SBA) Franchise Lending Group is here to help you navigate the franchise selection process. Connecting with a Valley expert is the first step in making your entrepreneurial dreams a reality. 

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