The 3 Primary Types of Franchise Systems
Sophie Cole, writer
Published at 30/03/2019, Updated on 04/05/2022 , Reading time: 6 min
Did you know there’s more than one type of franchise system? Here in the UK, most franchises use one of three formats: the business format franchise, management franchise and product distribution franchise. Wondering how to choose the right franchise system? We’ve outlined the differences between each, and how to know which one is right for you.
If you’re on the search for the ideal franchise, you’re probably overwhelmed by the sheer number of opportunities out there. And while you’ve probably given thought to the sector or service you’re interested in, you might not have considered which of the three primary types of franchise system are right for you.
Most franchises choose the business format franchise, where you’re sold a ‘business-in-a-box’ that you will run day-to-day. It’s the closest option to starting your own independent business. But if you’re looking for more freedom or want to invest in something that isn’t so hands-on, a management or product distribution franchise could suit your ambitions better. Here’s a run-down of the main similarities and differences between the three main franchise systems.
- Business Format Franchise
The business format franchise is the most common type of franchise system adopted in the UK. This system is what most people would describe as a ‘typical’ franchise. In return for a fee, franchisees are granted the rights to use the brand name, trademarks and operate in line with a set business plan. There are usually lots of rules that franchisees need to follow, covering everything from marketing to staff uniforms to opening hours.
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It’s up to the franchisor how involved they are with each franchisee’s business. Some issue comprehensive guidelines and leave the door open to franchisees whenever they need guidance or support, while others may have a more constant presence in their franchisees’ days/weeks.
Although on a surface level the business format franchise can appear restrictive, it’s one of the best franchises to own for inexperienced business owners. The franchisor’s business model has been tried and tested with a proven track record of success. In theory, all the franchisee needs to do is follow the franchise system to achieve the success they’ve always dreamed of.
Most of the world’s biggest franchise brands use this format, including McDonald’s, Subway, Costa Coffee and KFC. A typical tell-tale sign of a franchise adopting this popular business format is an uncanny level of similarity across multiple locations, everywhere from the decor to the products to the way you’re greeted by staff.
Not sure if this is the option for you? Generally, it’s best suited to budding entrepreneurs looking for a failsafe or turnkey business, or those that want more guidance/structure to guide them. It’s also suitable for more experience businesspeople seeking a proven business concept to invest in. You might have already dedicated years to building a labour-of-love independent business and now want to move on to something comparatively simple to run with excellent profit potential.
Ask yourself:
- Do I want to handle the day-to-day running of my franchise (or be responsible for staff recruitment if the business is too big to run alone)?
- Am I happy to follow relatively restrictive rules about how to run my business?
- Would I like more guidance and structure as I venture into business ownership, or to not have to worry about coming up with a new business concept?
- Do I want the satisfaction of working in my franchise, or offering the service/product myself?
- Will I enjoy directly interacting with customers?
- Management Franchise
If organising and planning suit you better than day-to-day customer interaction, a management franchise could be more appealing. This kind of franchise opportunity would see you manage a team of people that carry out your work, while you look after less customer-facing tasks like marketing, job allocation and business strategy. It can be a virtually passive investment if you choose, or you can just choose to handle the behind-the-scenes tasks while remaining fully involved.
Just like a business format franchise, franchisees receive training, support and advice from the franchisor in return for fees. The only real difference is that the franchisee focuses on the growth and the development of the business, rather than being heavily involved in the operational running. This concept is often appealing to those with previous management experience, or franchisees looking to enter a sector without the necessary qualifications/experience to actually carry out work.
You should consider:
- Do I have the skills and personality to manage a team of people? The best managers are confident, assertive and empathetic, among other things.
- Am I happy to let someone else handle the day-to-day running of my franchise?
- Am I happy to potentially sacrifice some profit to employ skilled staff?
- Will I be running my franchise alongside another commitment? If so, a management franchise can be less time-consuming than a business format franchise.
The management franchise system is probably adopted more frequently that you realise. There are a whole host of franchise opportunities in various industries that allow you to take a step back from the day-to-day running of the business. You could also invest in a re-sale franchise opportunity. This is where a franchisee has chosen to sell their franchise, but all the employees and the business structure remains in place.
- Product Distribution Franchise
This is a much less common franchise system, in which a franchisor will provide products for the franchisee to sell on. It’s similar to licensing but, as we’ve outlined previously, there are differences – read ‘What’s the Difference Between Franchising and (Brand) Licensing’ to find out more.
As with any business model, product distribution has its pros and cons. The most significant benefit is that the franchisee has fewer rules to follow and greater freedom to run their business how they wish. Of course, there are still some guidelines that must be adhered to, but they're nowhere near as comprehensive as a business format or management franchise.
The main downside of product distribution is that franchisees don’t receive any support or training from the franchisor. As a result, this system may not work for a new, inexperienced franchisee. If you’re more confident or enterprising, though, it can be very rewarding. You can run your own business distributing products which have an existing customer base.
Question time!
- Do I want to invest in something with less rules?
- Am I confident handling the day-to-day running of a business?
- Would I thrive with more independence or would a lack of support/structure hinder me? If the latter applies, the previous two models are probably better suited to you.
- Have I already built a business that I could offer a franchise’s products/services through?
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Which franchise system is right for me?
Hopefully by now, you’ve got a much better idea of which franchise system is likely to suit you. However, there’s a lot of variation from franchise to franchise – some business format franchises will offer lots of flexibility and little rules, while some product distribution franchise agreements may come with pages of terms and rules to stick to. Do plenty of research into each individual franchise agreement before committing to anything.
Want to learn more about what kind of franchisee you’re going to be? Check out ‘What kind of franchisee are you: entrepreneur or intrapreneur’, where you can narrow down the ideal opportunity for you. We’ve got hundreds of exciting franchises at Point Franchise - explore them all in our UK franchise directory.
Sophie Cole, writer