Business Format Franchise

There are nearly 800,000 franchise establishments in operation across the United States today. Even after many businesses across the board suffered a hit from the COVID-19 pandemic, it didn’t take long for franchising to bounce back. Even as early as 2022, Forbes was already declaring “a strong comeback” for franchising, with “more franchise brands continuing to grow and returning to normalization.”

Perhaps you’re reading this article as someone who’s thinking about opening a franchise—but unsure what, exactly, you’d be getting yourself into.

It’s certainly understandable why you would be considering this path, as the fundamental benefits of franchising are easy enough to understand. Starting your own business is a common flavor of the modern American Dream. But for all of its potential, the idea of starting a business totally from scratch can be overwhelming, even for individuals with a decent amount of experience or business acumen.

That’s why so many people choose franchise ownership. By opening a franchise, you can reap the benefits of business ownership—being your own boss, among others—without having to come up with an entire business plan on your own. Franchising helps mitigate some of the risks of entrepreneurship by providing an opportunity to hit the ground running. When you franchise, you benefit from a business model, customer base, branding, and other necessities that have already been accounted for as part of a detailed franchise business plan.

Is franchising right for you? In this article, we’ll introduce the main types of franchise arrangements. We’ll also help answer the question “Why choose a business format franchise?” by listing some business format franchise advantages and disadvantages. Finally, we’ll provide a few tips for finding the perfect franchise opportunity for you.

What Are the 5 Main Types of Franchises?

The 5 main franchise model types are job, investment, product distribution, business format, and conversion franchises. Business format franchising is the most common form, but it’s still worth defining each of these types of franchising before we go much further.

What Is a Job Franchise?

A job franchise can be run by a single person (and minimal additional staff, if any), often out of the franchisee’s own home. This franchise type is popular for its low investment cost and overall simplicity. Job franchise is often synonymous (for many people) with side hustle. Some common examples include services you might provide as an individual, like house cleaning, landscaping, tutoring, and so on.

What Is an Investment Franchise?

True to its name, this type of franchise ownership is best categorized as an investment (as opposed to employment). By purchasing an investment franchise, the franchisee is not likely to involve themselves in strategic decision-making or even daily operations. Rather, the franchisee acts more like a corporate investor, buying into a well-renowned brand.

What Is a Product Distribution Franchise?

In this franchising model, the franchisee secures the right to sell or distribute a particular company’s products to customers. Unlike other franchising models, within a distribution franchise agreement, the franchisee operates under their own name/identity, rather than under the larger company’s brand. Vending machine companies are a common example of this franchise type.

What Is a Conversion Franchise?

This is an opportunity in which an individual who already owns a business lets their company be absorbed by a larger competitor within the industry. When this takes place, the franchisee’s original business adopts the franchisor’s branding, converting itself from a wholly independent business to a franchise location.

What Is a Business Format Franchise?

The most common type of franchising, a business format franchise is what most people think of when they hear the word franchising. Purchasing a business format franchise means making an investment in order to own and operate your own location. For many franchisees, business format franchises represent an attractive balance of being their own boss without having to create a brand new business from scratch.

From here, let’s take a closer look at business format franchising.

How Does a Business Format Franchise Work?

When you purchase a business format franchise, you’re essentially buying into a known, existing brand with the intention to run your own location. A majority of the most popular franchises in operation use the business format franchise model, so you’re probably already familiar with many examples, which can be found across a number of different industries.

One of the most important questions about franchising centers around where the line separates the franchisor’s and franchisee’s responsibilities. In most instances of business format franchising…

• The franchisor provides the basic necessities for successfully operating a franchise location, such as any necessary equipment, staffing guidance, training, operational support, and marketing materials.
• The franchisee focuses on the daily operations and success of their franchise location, in alignment with the larger brand’s objectives and perspectives.

As you can see, the franchisor and franchisee are both working toward the same goal, which is success for the individual franchise as well as the larger brand. As a franchisee, then, you can expect plenty of support from the franchisor, since they should be as interested in your success as you are. That feature alone makes business format franchising a particularly franchisee-friendly endeavor, especially if you’re approaching it as someone without a wealth of personal business experience.

What Is an Example of a Business Format Franchise?

While fast food restaurants will come to most people’s minds, business format franchise examples are all around you, spanning categories such as restaurants, retail, and various service-based industries. Entrepreneur’s 2023 Franchise 500 Rankings include prominent examples from each of these categories, and more. Among their top-rated franchises are:

• Restaurants: Over half of the Franchise 500’s top ten opportunities are restaurants, with Taco Bell, Popeyes Louisiana Kitchen, and Jersey Mike’s Subs taking spots #1, #2, and #3. Dunkin’ Donuts, Culver’s, and Wingstop also made the top 10 (at #5, #8, and #10).
• Business Services: The UPS Store ranks #4 on Entrepreneur's list, with FastSigns, Minuteman Press, and Signarama also cracking the top 10.
• Retail: Ace Hardware ranks #7 on the Franchise 500. Pet Supplies Plus, Buddy’s Home Furnishings, and Snap-on Tools are also within the top 20.
• Tutoring Services: Kumon Learning Centers rank #6 in the Franchise 500; Mathnasium also ranked in the top 100, coming in at #80.
• Lodging: Hampton by Hilton takes the #9 spot within the Franchise 500 rankings, with several competitors within the top 100 spots, including Home2 Suites by Hilton, Embassy Suites, and Motel 6.

Let’s say you’re thinking about operating a McDonald’s franchise location. There are at least 38,000 McDonald’s locations throughout the world today, a vast majority of which have independent franchisees serving as owners/operators. If you were to purchase a McDonald’s franchise today, you would receive the rights to the ubiquitous brand, products, and customer base. Running the location’s daily operations, on the other hand, would become your responsibility. This means you’ll at least need to be prepared to:

• Recruit, train, and manage staff.
• Generate local brand awareness.
• Market and grow the business location.

Since it’s in the larger brand’s best interest to ensure consistency and quality across all locations bearing its name, you can rest assured that you’ll have a lot of support along the way. The franchisor will likely offer specific training and onboarding, as well as ongoing guidance to help manage the business over time.

What Are Business Format Franchise Advantages?

One of the main reasons why business format franchising is the most commonly-adopted models is due to the advantages it presents, which include:

• Help and support in running the business. If there’s one factor that drives people toward business format franchising, it’s the extensive support a franchisee receives from the franchisor. While you’ll be well-served to have some level of business acumen and ingenuity, as a franchise owner-operator you don’t need to know everything. The division of responsibilities will often be laid out in plain terms within the franchise agreement.
• A brand—and customer base—that is already established. One of the hardest—if not the hardest—things about successfully running a business is getting it off the ground. Generating brand awareness and building a loyal customer base can be difficult, even for some experienced entrepreneurs. With a business format franchise, the groundwork for these important functions is already in place. You’ll still need to do some marketing, of course, but you won’t be starting from a blank slate—quite the opposite!
• A lower risk of failure. The risk of a franchise failing is generally much lower than it would be if you were building a new business from scratch. That’s largely because of the other advantages in this very list, such as the established brand and customer base, and various levels of training, support, and guidance provided by the franchisor.
• Increased profits. When they’re managed well, franchises can be reliably profitable. Success depends on a few variables, though. In most cases, for example, the total investment cost to purchase a franchise will be lower than the total startup costs associated with a non-franchise business. That makes the path to profitability a little straighter to follow. Franchises also benefit from an already-established (and profit-generating) business model, which greatly demystifies the process.
• Being the boss. This point requires little elaboration, as it’s one of the fundamental and obvious advantages to franchise ownership. For many people, franchising means enjoying the perks of being the boss (like setting your own schedule) without all of the responsibilities (like developing a profitable business model).

What Are the Disadvantages of Business Format Franchise Ownership?

There can be a few potential business format franchise disadvantages, including:

• Steep initial costs. The total investment required to purchase and operate a franchise can range from $25,000 or less to $500,000 or more. This can prove challenging to franchisees, but browsing for opportunities you can comfortably afford to invest in will help you minimize this particular risk. Franchise.com has plenty of opportunities for all investment levels, including $50,000 or less.
• Restrictions and regulations. If you’re too enthusiastic about being your own boss, you might find yourself frustrated in certain situations where your ideas don’t align with what the franchisor dictates. You’ll usually learn exactly where your responsibilities as the franchisee start and end by reviewing the franchise agreement.
• An established brand. Yes, this point was also listed as an advantage. That’s because the idea of an established brand truly can be an advantage or a disadvantage, depending on your perspective.. If you’re eager to define a brand or become the face of the business, you might find the business format franchising model to be a bit too constraining—which could lead to conflict.
• Ongoing challenges related to the COVID-19 pandemic. The COVID-19 pandemic presented seemingly endless challenges for a wide variety of businesses. And while we seem to be through the worst of it, with a recovering economy, “struggles still remain” according to Forbes, including “supply chain and distribution issues, rising cost of labor and the ability to find labor, and fighting rising rates and inflation.” These challenges, of course, are not specific to franchising; they affect virtually every business.

When it comes to advantages and disadvantages, no two franchise opportunities are going to be identical. Even under the shared umbrella of a franchise’s brand, there may be a number of location-specific variables related to how easy (or difficult) it might be to promote—and grow—the business. This means it’s vital that you do your research, much like you would do for any sizable investment.

Is a Business Format Franchise Likely to Succeed?

Compared to a start-up business model, a business format franchise offers favorable odds of success. While nothing is ever going to be fully foolproof, the fact that you don’t have to create the brand from scratch or lay any of the fundamental business infrastructure removes a certain amount of risk from the equation. If you don’t have enough capital to cover the initial investment cost as well as ongoing expenses, however, you might find yourself starting off a bit behind the proverbial 8-ball.

Due to the number of variables, it’s difficult to provide hard-and-fast answers about whether you’re more likely to succeed as a franchisee or by opting to start a brand-new business. General statistics indicate that franchise failure rates are, on average, around 10% to 20%. Keep in mind that this is an average range—some franchises are likely to have even smaller failure rates, while others might fail at rates approaching 40% or more.

By comparison, according to Investopedia, “20% of startup businesses don’t survive the first year; about half make it to year five; and approximately 35% last ten years.”

Elsewhere, you might find sources claiming exceptionally high success rates for franchisees, suggesting that as many of 90% of franchises succeed. Stats like these, however, are often unhelpful without context, making such potentially misleading claims subject to a number of exceptions, conditions, and wishful thinking. The ultimate takeaway here is that for most people, franchising—especially business format franchising—represents a lower risk of failure than starting a new business from the ground up.

How Do I Find the Right Business Format Franchise Opportunity?

Finding the best franchising opportunity for your lifestyle, objectives, and priorities can feel complicated, but it doesn’t need to be. We’ll leave you with 5 quick tips for evaluating your options.

1. Determine what your goals are. Use our advantages and disadvantages lists (above) to make sure franchising in general is right for you. If you’re wanting to be the face of the business and be entirely in charge of how it should operate, then business format franchising in particular might not be for you. Remember that no two franchises are identical, and that there are countless variations on the franchisor-franchisee dynamic. Review the 5 main franchise types we discussed earlier to compare the different levels of involvement/responsibility, so you can find an ideal arrangement.

2. Evaluate your options. There are several ways to do this, but we recommend that you start your search at Franchise.com. From our homepage, you can easily browse for opportunities in your area based on factors such as investment level and industry/category. Or, you can browse our selection of low-cost franchises, work from home franchises, or see the top 25 franchises and newest franchises available in your state.

3. Review franchise agreements carefully. This legal document is what ultimately determines what your rights, obligations, and responsibilities as a franchisee will look like. Before you commit to any single franchisor to work with, make sure you understand what you’re getting into—and don’t be afraid to ask about anything that’s not clearly outlined or understood. Remember, the franchisor should be as invested in their franchisees’ success as they are, so finding a good mutual fit is important.

4. Ask the right questions. Before you invest in a particular franchise, you’ll want to do some due diligence so you can know more about what exactly to expect. You can always use the internet to research franchises you’re interested in. You could also directly ask questions to the franchisor during the interview process. We recommend asking at least four questions to better understand important business details to ensure a good fit:
   • “What is my earnings potential?”
   • “What are my renewal options?”
   • “What support does your company offer?”
   • “How would you describe your company culture?

5. Don’t ignore red flags. No one wants to experience buyer’s remorse, especially when franchise investment costs can be substantial. If the opportunity seems too good to be true, it quite possibly is. When you speak with the franchisor or even other franchisees, encourage them to share the good, of course—but also the not-so-good. What are the main challenges franchisees face, and how supportive is the franchisor? Asking this type of question will help you understand the brand, including its philosophy or culture, in a way that simply reviewing financial statements or company websites won’t.

Start Your Search for the Best Franchise Opportunities in Your State

Visit Franchise.com to start your search today. You’ll find options for every investment level, across 40 distinct categories, from automotive franchises to gyms, pets, real estate, travel, and so many more! With a single click on any particular franchise, you can easily view the total investment cost and learn more about the business.

See something you like? Simply click the red "Get Free Info" button to request more information, and then watch your email!