What is a Franchise?

A franchise (or franchising) is a method of distributing products or services involving a franchisor, who establishes the brand's trademark or trade name ... Skiptomaincontent Breadcrumb Home FAQsAboutFranchising WhatisaFranchise? WhatisaFranchise? Afranchise(orfranchising)isamethodofdistributingproductsorservicesinvolvingafranchisor,whoestablishesthebrand’strademarkortradenameandabusinesssystem, andafranchisee,whopaysaroyaltyandoftenaninitialfeefortherighttodobusinessunderthefranchisor'snameandsystem.Technically,thecontractbindingthetwopartiesisthe“franchise,”butthattermmorecommonlyreferstotheactualbusinessthatthefranchiseeoperates.Thepracticeofcreatinganddistributingthebrandandfranchisesystemismostoftenreferredtoas franchising. Therearetwodifferenttypesoffranchisingrelationships.BusinessFormatFranchisingisthetypemostidentifiable.Inabusinessformatfranchise,thefranchisorprovidestothefranchiseenotjustitstradename,productsandservices,butanentiresystemforoperatingthebusiness.Thefranchiseegenerallyreceivessiteselectionanddevelopmentsupport,operatingmanuals,training,brandstandards,qualitycontrol,amarketingstrategyandbusinessadvisorysupportfromthefranchisor.Whilelessidentifiedwithfranchising,traditionalorproductdistributionfranchisingislargerintotalsalesthanbusinessformatfranchising.Examplesoftraditionalorproductdistributionfranchisingcanbefoundinthebottling,gasoline,automotiveandothermanufacturingindustries.   FranchisingIsAboutRelationships Manypeople,whentheythinkoffranchising,focusfirstonthelaw.Whilethelawiscertainlyimportant,itisnotthecentralthingtounderstandaboutfranchising. Atitscore,franchisingisaboutthefranchisor’sbrandvalue,howthefranchisorsupportsitsfranchisees,howthefranchiseemeetsitsobligationstodelivertheproductsandservicestothesystem’sbrandstandardsandmostimportantly–franchisingisabouttherelationshipthatthefranchisorhaswithitsfranchisees. FranchisingIsAboutBrands Afranchisor’sbrandisitsmostvaluableassetandconsumersdecidewhichbusinesstoshopatandhowoftentofrequentthatbusinessbasedonwhattheyknow,orthinktheyknow,aboutthebrand. Toacertainextentconsumersreallydon’tcarewhoownsthebusinesssolongastheirbrandexpectationsaremet.Ifyoubecomeafranchisee,youwillcertainlybedevelopingarelationshipwithyourcustomerstomaintaintheirloyalty,andmostcertainlycustomerswillchoosetopurchasefromyoubecauseofthequalityofyourservicesandthepersonalrelationshipyouestablishwiththem.Butfirstandforemost,theyhavetrustinthebrandtomeettheirexpectations,andthefranchisorandtheotherfranchiseesinthesystemrelyuponyoutomeetthoseexpectations. FranchisingIsAboutSystemsandSupport Greatfranchisorsprovidesystems,toolsandsupportsothattheirfranchiseeshavetheabilitytoliveuptothesystem’sbrandstandardsandensurecustomersatisfaction. And,franchisorsandalloftheotherfranchiseesexpectthatyouwillindependentlymanagetheday-to-dayoperationofyourbusinessessothatyouwillenhancethereputationofthecompanyinyourmarketarea. Whenselectingafranchisesystemtoinvestin,youwanttoevaluatethetypesofsupportyouwillbeprovidedandhowwellthefranchisorismanagingtheevolutionoftheproductsandservicessothatitkeepsupwithchangingconsumerexpectations. Someofthemorecommonservicesthatfranchisorsprovidetofranchiseesinclude: Arecognizedbrandname, Siteselectionandsitedevelopmentassistance, Trainingforyouandyourmanagementteam, Researchanddevelopmentofnewproductsandservices, Headquartersandfieldsupport, Initialandcontinuingmarketingandadvertising. Youwanttoselectafranchisorthatroutinelyandeffectivelyenforcessystemstandards. Thisisimportanttoyouasenforcementofbrandstandardsbythefranchisorismeanttoprotectfranchiseesfromthepossiblebadactsofotherfranchiseesthatsharethebrandwiththem. Sincecustomersseefranchisesystemsasabrandedchainofoperations,greatproductsandservicesdeliveredbyonefranchiseebenefitstheentiresystem.Theoppositeisalsotrue. FranchisingIsalsoaContractualRelationship Whilefromthepublic’svantagepoint,franchiseslooklikeanyotherchainofbrandedbusinesses,theyareverydifferent. Inafranchisesystem,theownerofthebranddoesnotmanageandoperatethelocationsthatserveconsumerstheirproductsandservicesonaday-to-daybasis. Servingtheconsumeristheroleandresponsibilityofthefranchisee. Franchisingisacontractualrelationshipbetweenalicensor(franchisor)andalicensee(franchisee)thatallowsthebusinessownertousethelicensor’sbrandandmethodofdoingbusinesstodistributeproductsorservicestoconsumers.Whileeveryfranchiseisalicense,noteverylicenseisafranchiseunderthelaw.Sometimesthatcanbeveryconfusing. IntheUnitedStates,afranchiseisaspecifictypeoflicensingarrangementdefinedbytheFederalTradeCommissionandalsobyseveralstates.IntheUnitedStatesafranchisegenerallyexistswhen: Thefranchisorlicensesafranchiseetherighttouseitstradeorservicemark; Toidentifythefranchisee’sbusinessinmarketingaproductorserviceusingthefranchisor’soperatingmethods; Thefranchisorprovidesthefranchiseewithsupportandexercisescertaincontrols;and, Thefranchiseepaysthefranchisorafee. Thedefinitionofafranchiseisnotuniformineverystate. Somestatesforexample,mayalsoincludeamarketingplanorcommunityofinterestprovisioninthedefinition. Thedefinitionofwhatisafranchisecanvarysignificantlyunderthelawsinsomestatesanditisimportantthatyoudon’tsimplyrelyonthefederaldefinitionofafranchiseinunderstandinganyparticularstate’srequirements. Putanotherway,inafranchiseabusiness(thefranchisor)licensesitstradename(thebrand,suchasBrightStarCareorSportClips)anditsoperatingmethods(itssystemofdoingbusiness)toapersonorgroupoperatingwithinaspecificterritoryorlocation(thefranchisee),whichagreestooperateitsbusinessaccordingtothetermsofacontract(thefranchisingagreement). Thefranchisorprovidesthefranchiseewithfranchisingleadershipandsupport,andexercisessomecontrolstoensurethefranchisee’sadherencetobrandguidelines. Inexchange,thefranchiseeusuallypaysthefranchisoraone-timeinitialfee(thefranchisefee)andacontinuingfee(knownasaroyalty)fortheuseofthefranchisor’stradenameandoperatingmethods.Thefranchiseeisresponsiblefortheday-to-daymanagementofitsindependentlyownedbusinessandbenefitsorriskslossbasedonhisownperformanceandcapabilities. Investinginafranchiseorbecomingafranchisorcanbeagreatopportunity. Butbeforeyouselectanyfranchiseinvestmentandsignanyfranchiseagreement,doyourhomework,understandwhatthefranchisesystemisofferingandgetthesupportofaqualifiedfranchiselawyer.   Findoutmoreaboutfranchisingbyvisitingourfrequentlyaskedquestionspagehere.  CloseModal