The Franchise Business Model, Explained

Franchising dates back centuries, and the roles and responsibilities of franchisors and franchisees have shifted and evolved with time. One of the few consistencies across franchise systems is a focus on marketing. Consistent, effective marketing is the linchpin of any effective franchise organization, which is why it is prioritized in every facet of the franchise system, from agreements to daily operations.

Whether you’re a new franchisor or an aspiring franchisee, it’s important to understand the subtle differences between popular franchise structures. Learn how marketing responsibilities are divided and costs covered in popular franchise models.

How Is a Franchise Structured?

Within any franchise system, there are two distinct parties: the franchisor and the franchisee. Across franchise ownership structures, the specific responsibilities (and liabilities) for each party differ. Ultimately, the combined efforts of both entities should position both individual franchise locations and the system for sustainable, long-term growth.

Franchisor Responsibilities

There may be some differences across systems, but most place the following responsibilities firmly in the franchisor’s hands.

• Marketing strategy – Franchise marketing is an integral part of the corporate or national franchise’s daily operations. They usually handle strategy development, national and regional marketing efforts, and provide franchisees with guidelines, resources, and marketing support.
• If the system has an exclusive local marketing vendor (hey, hi), they may coordinate with that organization on behalf of individual franchisees.
• Product and service development – Franchisors are responsible for improving existing offerings and developing new product and service lines.
• Manage territories – The franchisor is responsible for establishing and selling available territories.  
• Training – The franchisor should provide comprehensive training on products and services, business management, technology, and other aspects of running a franchise.
• Communication and support – Franchisors invest heavily in support staff to answer questions, solve problems, and provide support for owners, especially in the owner’s first twelve months of operation.
• Business development – Franchise systems often seek out national partnerships to provide business opportunities for owners, or to grow through multi-unit franchising by expanding operational territory.

Franchise Owner (Franchisee) Responsibilities

Franchisees are integral to the long-term success of any franchise system. The reputation of a brand nationally often depends on the professionalism and dependability of every individual location; one bad news story in a single city can have a dramatic impact on business nationwide.

• Customer relationships – Franchisees are the in-person face of the brand. They interact with customers, perform the work, or sell the product, and, as a result, their interactions impact success more than national efforts. No system in the world can overcome bad products or services delivered unprofessionally.
• Financial commitment – Franchisees invest in the franchise through upfront and ongoing franchise fees. They may also need to purchase or lease equipment or commit to other financial contributions.
• Choose and run a location – While franchisors typically assist with location selection, the franchisee must ultimately select, lease, and potentially build out office or retail space.
• Workforce – Franchise owners must hire, train, and manage employees while following guidelines set by the franchisor.
• Operations – Franchisees commit to running their business according to the franchise system’s standards. This includes selling only approved products or services, following brand guidelines, and meeting quality expectations.

Why Franchising Works

There are five primary franchise ownership structures, each designed to meet different industry needs. As much as the method varies, the goals are the same. Franchising businesses strive to maximize the aggregated benefits of the franchise model, such as:

• Brand recognition
• Business support and development
• Increase marketing power
• Lower failure rate
• Increased buying power for resources and materials

These are strong incentives for existing and new business owners to join franchise systems operating in an expansive range of industries, from fast food to home services to mobile car care. There are hundreds of franchise business examples, and all are built on the premise that a rising tide lifts all boats.

5 Types of Franchise Systems

The five most common franchise systems serve as frameworks, not rules. Many franchise systems borrow from several of these structures to improve efficiency or grow quickly.

1. Master Franchising

The master franchise model is usually the go-to option for international markets. Franchisors collect a fee from franchisees in return for ongoing support, traditionally restricted to training. In many cases, the franchisee has exclusive control of the entire territory, whether it be a single country or a governmental body. For example, a master franchisor may license a franchisee to operate within the European Union.

This style creates a buffer for the franchisor, reducing its responsibility and liability in working with local governments and regulations.

While the franchisor may provide a marketing budget and resources, most franchisees are responsible for creating and running marketing campaigns within their territory. Many work with third-party vendors to reduce in-house expenses and improve the effectiveness of their budget.

Some examples of master franchisors include Burger King, Starbucks, and Jersey Mike’s.

2. Area Representative Franchising

In a representative franchise area, representatives hold exclusive rights to operate within a specific region. These tend to be domestic agreements, limiting agreements to certain cities, counties, or subregions. The biggest difference from master franchising is that area representatives are not solely responsible for supporting franchises; they sign contracts with the franchisor, which reduces responsibility and liability for the area representative.

Marketing efforts in this model are dynamic, with most decisions and costs resting with the franchisee. The marketing budget can be based on performance incentives and franchise research, but franchisees typically make decisions and manage marketing themselves.

Mobile pet groomers are the perfect example of an area representative franchise. They don’t own a fixed location but represent the brand in a clearly defined service area.

3. Area Development Franchising

While the names are similar, area development is quite different from area representation.  In an area development franchise, a franchisee agrees to “develop” a specific number of unique locations within a predefined territory. For example, a home services franchisee may agree with a developer to open five cleaning locations in the Detroit metro area within 10 years.

These agreements vary based on the goal or the organization, available budget, and market research findings (typically conducted by both the franchisee and franchisor). Many development companies conduct their own market research before signing an agreement.

In this scenario, marketing responsibilities are included in the agreement and may change after the contract requirements are met. Once operations are up and running, they may receive varying levels of support depending on the brand.

Examples of area development franchises are Pizza Hut, Circle K, and Panera Bread.

4. Individual Franchising

This is one of the more common types of franchise business structures because of its relative accessibility and low barrier to entry. Also known as owner-operator franchises, in an individual franchise, the franchisee agrees to own and control a single franchise location with some basic territorial guarantees. The agreement might restrict the franchisor from opening or selling a competing location too close to the first owner-operator; it’s a lesson Subway learned the hard way.

In this model, the franchisor is responsible for most marketing efforts funded through a franchise marketing fee. Many owner-operators will actively market themselves on a hyper-local level; that’s why the local Burger King might also sponsor your child’s local Little League team.

Individual franchising technically includes any franchise system that only requires a single location, but it’s notably common among automotive service providers (think Jiffy Lube) and fitness centers like Anytime Fitness.

5. Conversion Franchising

Conversion franchising is one of the most common business models for HVAC, plumbing, and other home services industries because it’s relatively simple. Existing small businesses convert to the franchise by rebranding and utilizing the franchisor’s sales, accounting, scheduling, or other processes. While conversion franchising looks like an individual franchise on its surface, the agreement is usually different.

Because most conversion franchises include established businesses, they have a substantially lower failure rate. That usually makes them more attractive to franchisors, who may offer better agreement terms, lower fees, or a different incentive system at the time of conversion.

Conversion franchising is a growth strategy, and while the agreements may include some unique details, they usually fall into the individual franchise model once the transaction is complete, with many of the same responsibilities as an owner who joined without having an operational business.

Most conversion franchises maintain their existing marketing efforts during the transition and dedicate a budget to ongoing local marketing after rebranding. The franchisor will conduct national or regional marketing, such as a booking website, social media assets, or email marketing.

Conversion franchising examples include Ace Hardware, RE/MAX, Best Western, and other hospitality businesses, plus home service franchisors like Neighborly.

The Common Thread: Contractual Marketing

Regardless of structure, franchising is the most common type of contractual marketing system. Contract marketing refers to any agreement that outlines the rights and responsibilities of two parties to conduct marketing operations. In franchising, that’s all included (in precise detail) in the franchise agreement, but it’s a pervasive term; when you sign a retainer or project with Oneupweb, you’re committing to a type of contractual marketing.

What Is the Best Business Structure for a Franchise?

There’s no one-size-fits-all when it comes to franchising. The examples mentioned above are best thought of as starting points, with most franchise organizations offering different structures over time, based on evolving priorities, goals and opportunities.

New to Franchising? We’re Not!

As a franchise marketing agency, we’ve worked with different structures and industries for over 20 years. We’ve built solid and lasting relationships with franchise clients by adapting our working methods to meet your needs. We work with existing franchise companies, new franchisors, and individual franchises.

Put your marketing team and franchises in a position to succeed; get in touch or call (231) 922-9977 today to learn more!