What Is Franchising

Franchising is a way to grow your business that lets you sell your knowledge, experience, and concept to dedicated individuals who put up the money to open and operate new franchise locations. Franchising will let you expand with less overhead and fewer day-to-day operating headaches, while the franchise buyers pay you upfront franchise fees and ongoing royalties forever.

Franchising has expanded to include an ever-widening variety of businesses, products, and industries. Its application to new concepts and emerging industries will only increase in the future.

Franchises are generally known to the public under a well-promoted name like McDonald's® not the names of the individual franchise owners. As a result, the general public may not realize that many businesses are in fact franchises. The first box below depicts 100 well-known franchises; the second box lists 100 relatively unknown franchise companies that have more than 200 franchises each.



Historical Definition
Historically, the word "franchising" meant the granting of a right or privilege to an individual or group. In more recent times it includes business arrangements known as franchises, licenses, dealerships and distributorships, to name a few.

Regulatory Definition
The Federal Trade Commission defines "franchising" as a business relationship in which an individual owner:

1. Uses a Common Name (such as Burger King® or Dunkin' Donuts®);

2. Receives Training/Assistance/Guidance (from the Parent Company);

3. Pays a Fee To the Parent Company ($500 or more within the first six months of operation).

If a business arrangement includes these 3 elements, it's a franchise. It could be called a license, dealership, distributorship, or association but it's still a franchise and must comply with the rules of the Federal Trade Commission and certain state regulatory authorities.

Business Definition
Franchising has been described as:

A method of DISTRIBUTION of goods and services;

A method of MARKETING;

A method of GROWTH;

A method of CAPITAL ACQUISITION;

A method of EMPLOYMENT.

For a company wishing to expand to other locations, franchising offers the opportunity to have branch locations operated by "dedicated" managers rather than company employees. A franchisee is dedicated because it's their business (operating under the franchisor's name and rules) and they've made an investment. A franchisee will sell more, service customers better, and control costs more tightly than a company employee.

What Franchising is NOT

1. Franchising is not an industry. There is no such thing; over 300 different industries and types of business utilize franchising.

2. Franchising is not a magic show. Franchising is not about selling some franchises. It's about building a company - a serious business venture. A person who franchises their restaurant to others will still be in the restaurant business. They will have to develop new menu items, new promotional programs, new décor concepts, and so forth.

Types of Franchises
Historically, franchises have been generally categorized as "product and trade name" franchises or "business format" franchises. Today, the real difference is that under the "product and trade name" franchise, the franchisor is usually the manufacturer of a product, which it wholesales to the franchisee for resale. Under the "business format" approach, the franchisee is usually not reselling a product manufactured by the franchisor. Under both formats, the franchisee is operating the business according to the franchisor's rules, methods, and systems.