The Basics of Franchising

If you want to get in on the ground floor of franchising, it’s best to understand the basics of how it all works. Entrepreneurs don’t just shop at a big box franchise store and make their selections before heading to the self-checkout. Franchising is a business model that requires some understanding of how it operates.

Many types of franchises and franchising operations exist today. And the range of industries that have hopped on the franchising wagon continues to expand. It’s estimated that over 120 different industries use franchising. Restaurants and fast food are still, by far, the most popular, but more and more, franchises are developing in fitness, martial arts, medical services, home health, and the digital realm, just to name a few.

What is Franchising?

At its very foundation, franchising is a business relationship between a franchisor and its franchisees. In the most popular form of franchising, the franchisor licenses its trade name and operating methods to a franchisee. The franchisee agrees to do business according to the terms of the license, which essentially stipulates that the franchisee operate according to the franchisor’s model.

Franchising is a business model that facilitates expansion by distributing goods and services through multiple outlets. It works based on the relationship between the brand owner (the franchisor) and local operators (franchisees), working together as a team.

It’s also a legal, contractual relationship, where both the franchisor and franchisees are each considered separate and different businesses. The franchisor works to add additional franchises and support its existing franchisees, while each franchisee agrees to manage and operate their business to the terms of their franchise agreement.

Here is the official definition of a franchise by The Federal Trade Commission, provided in Section 436.1(h) of the Franchise Rule:

A “Franchise means any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:
(1) The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark;
(2) The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and
(3) As a condition of obtaining or commencing operation of the franchise, the franchisee makes a requirement payment or commits to make a required payment to the franchisor or its affiliate.”

What is a Franchisor?

The franchisor is the parent company that seeks to expand by selling franchises of its own business for other owners to operate. A franchisor essentially sells a license for another business owner to operate under its brand, use its methods of operation, and sell its products or services. In return, the franchisor receives certain fees and royalties for the use of all it provides to each franchise.

In return, the franchisor provides the franchisee with many forms of business support, such as:

  • Location selection
  • Acquiring property (in some cases)
  • Constructing a building (in some cases)
  • Initial training
  • Ongoing training
  • Marketing
  • Customer support
  • Purchasing agreements
  • Assistance with equipment
  • Financing (in some cases)

The franchisor takes almost no role in the day-to-day management of the franchisee’s business. The franchisee is an independent operator, not a joint employer with the franchisor. The franchisor does exercise a measure of control over some elements of the franchisee’s operations. This is to ensure that the parent company protects its intellectual property, and that each franchisee follows the franchise guidelines outlined in the franchise agreement.

What is a Franchisee?

The franchisee is an entrepreneur who purchases the right to operate a business using the franchisor’s brand name and operating methods. In exchange for the use of the parent company’s intellectual property and a measure of business support, the franchisee usually pays the franchisor an initial franchise fee and continuing royalties, often a percentage ofoverall gross profit.

A franchisee is an independent business owner, free to hire, compensate, schedule, set employment standards and practices, and discipline their staff without any input from the franchisor. While features like uniforms and food preparation processes are part of the parent company’s brand requirements, the rate of pay or the hours scheduled fall under control of the franchisee.

Are you ready to learn more about franchising, and how you can franchise your business? Or are you an entrepreneur seeking to explore franchise opportunities for investment? Contact an advisorwith Franchise Guardian today for help with your next steps into franchising.

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