The 7 Main Ownership Models in Franchising
Updated: Aug 23, 2021
Suppose you want to be hands-on in your business without the stress of full-time employees and the ability to replace a full-time income while moving away from corporate America. In that case, this self-employed model might be just for you.
A lot of prospective owners assume they need to spend more to make more. However, it's the exact opposite.
In franchising, the further the owner gets away from the day to day operations, the higher the investment tends to be. Still, as a self-employed franchise owner, you are business for yourself but not by yourself.
The self-employed model boasts the lowest investment level in franchising, along with a fast ramp-up and high earning potential. These businesses almost always come with a home office set-up and low to no inventory.
Self-employed franchise models appeal to both white and blue-collar owners. They are present in various industries, such as marketing, business coaching, consulting and cost reduction services, senior care, recruiting, home and business services, repair and maintenance, and education.
As the name implies, the Owner-Operator model places the franchisee front-and-center in the function of the business. In this hands-on, day-to-day leadership model, the owner is highly visible to their internal and external customers.
Owner-operators typically work onsite most days the business is open. They directly supervise the staff needed to run the operation and have little time to do much besides running their business, similar to a full-time job.
In this model, the owner works in their business more than they work on it.
Franchisors often seek to build on the owner-operator model, as they know intimately the qualities necessary for franchisees to succeed. They define a specific set of skills and attributes required by a successful owner, and they award their franchises accordingly as part of their overall recipe for success.
Owner-operator models tend to have a lower cost of entry and a quicker ramp-up to profitability since the owner plays the primary manager role and directly impacts its outcome.
If you are a hands-on leader that wants to be active in the day to day operation, this model may be just right for you. These businesses span various industries and can operate out of a home office, traditional office, light industrial, or retail storefronts.
The Executive model enables the franchisee to work on their business vs. working in it, as they tend to hire all the critical functions required to operate.
Executive owners see themselves and play the role of CEO. People who had successfully built businesses before or worked in a high-level management position tend to do very well in these models. These are visionary leaders who set standards, establish the culture, and drive performance.
While these owners typically start hands-on to learn all essential aspects of their business, they scale back their daily involvement over time, which provides the lifestyle they ultimately desire. Common long-term goals among these owners are building a strong organization and building wealth through a legacy business.
The franchisors are looking for growth-minded partners who can build and scale a business, not turn a wrench or fix a leak. These leaders focus on opening multiple units or expanding their business across a broad geography and even acquire competitors as part of their growth strategy.
Everyone wants to know about the hottest brands in franchising and what other people are buying. While there is no one size fits all brand, there is one common theme among my candidates.
The Semi-Absentee ownership model provides the owner with full control of their schedule and lifestyle, as there are typically no legal requirements to be physically present.
These businesses are structured to be manager-run from the onset with the unit economics to support it. And you can keep your day job while building something for the future, as funding for these projects is a lot easier when the owner keeps their household income intact.
While each brand is different, most owners look to invest 15-20 hours per week on their semi-absentee business, reviewing financials, overseeing marketing, interacting with the franchisor, and supporting their manager(s) and staff.
Many semi-absentee franchisees are multi-unit owners. When done correctly, adding a second or third unit shouldn't double or triple the owner's time involvement, making this model highly scalable.
True Absentee ownership is tough to find. While several opportunities claim to be, as you dig in and validate with the owners and staff, you will struggle to find it.
I work with a lot of doctors, dentists, and other busy professionals. If they intend to keep their day job, there is almost zero ability for them to work in their business, given the nature of their schedules.
There are, however, a few niche franchises that pull this off successfully. They leverage technology, have low to no employees, and enable their owners to work on their business in as little as 2-5 hours per week. For those reasons, these can be dream businesses to own.
Many of these models have a real estate play involved, which is a big draw for these types of owners and investors. It's even harder to find these businesses as a resale. However, when you do, you'll see they command the highest multiplier of earnings. This is great news for prospective franchisees when it comes to exit planning.
While most absentee models are not low-cost businesses, they certainly make up for it in the owner's lifestyle and resale value.
Area/Regional Developers bring vision and financial resources to the franchise relationship. This multi-unit ownership approach ensures plenty of room to scale, whether these are single owners or investment groups.
In addition to a standard franchise agreement, they execute a development agreement, which typically includes exclusive rights for the protected territory, provided they open their units on time. For example, if they secure three, five, or ten units upfront, they may have to open those locations within three, five, or ten years.
Locking in a market area enables these owners to leverage marketing efficiencies and quickly establish brand awareness. It also helps alleviate staffing challenges as they have multiple locations close to one another.
Area/Regional Developers are pioneers who see tremendous value and opportunity with their brand and look to build a company rather than a single business. They spend their time hiring and coaching managers, overseeing financials, and developing additional units.
There are two main support structures in franchising: direct franchisor to the franchisee and the master franchise model.
Franchisors partner with a master to provide front line training and support services in a specified territory, including drafting and managing local franchise agreements and overseeing compliance.
The master pre-pays for exclusive rights to a large territory, typically a state or region, and then shares in franchise fees and royalties collected in their area.
Most masters handle growth and development by recruiting individual franchisees. Master franchising is a rapid growth strategy to expand a brand quickly without hiring an extensive corporate infrastructure. However, this shared revenue/responsibility model is not for everyone.
While franchisees need to be strong operators, masters are once removed from front line customers and are really in the royalty business. They need to be strong in management, franchise sales and serve as the brand ambassador to be successful.
If you are interested in exploring franchise ownership, I would be glad to learn about the industry and sort through top matching opportunities specific to your income and lifestyle goals.
I bring ~30 years of industry experience, having owned multiple units of multiple brands myself. I've written the checks and signed the contracts, which means I bring a different perspective to our relationship than working with a franchise salesperson.
I'm here to help you figure out if franchising is right for you!
Schedule an intro call with me: www.calendly.com/myfranchoice