Thursday, Sep 28, 2023

What is a Franchise?


Your own business comes in a variety of forms, the franchise model involves two parties. The franchisor owns the trade name or brand trademark, while the franchisee owes royalties and a fee to use that trade name to run a franchise. It’s a business based on brand guidelines proven to ensure customer satisfaction.

What Is a Franchise?

This is a business system that distributes products and services under a contractual relationship. Franchise owners are often entrepreneurs who partner with corporate brands.

The franchisee operates under the franchisor’s products, logo, and brand name. These systems usually offer different ownership models so entrepreneurs can run a flexible business.

You can get more info from a Franchisor’s Trade Show. This will help you get started with this type of business ownership.

The Main Types of Franchise

Types of FranchisesDescription
Job FranchiseThis type of franchise typically revolves around specific jobs or services. An example is event planning.
Product FranchiseThis focuses on the sale of specific products. Computers and appliances fall under this category. Most US retail sales are associated with this type of franchise.
Conversion FranchiseA hybrid model where existing companies get converted into a franchise. Florists and electricians are examples of this category.
Business Format FranchiseFranchisees operate under the company's established brand. This can include fast food, fitness, and retail
Investment FranchiseThese are typically larger franchises that require substantial investment, like hotels and big restaurants.

  • READ MORE: See our Franchise Guide

Why Do Companies Franchise their Businesses?

Franchising offers companies a method to expand their brand and reach without the substantial costs of traditional growth.

Through this business model, companies can rapidly penetrate markets and gain a competitive edge. Here are five key reasons why businesses choose the franchising route:

  • Brand Expansion: By franchising, companies can spread their brand name and presence to various regions, leveraging the local knowledge and investment of individual franchisees.
  • Reduced Risk: The franchisee typically assumes many of the risks associated with opening a new location, such as leasing a property and hiring staff. This reduces the financial and operational burden on the parent company.
  • Consistent Quality Control: Franchising allows companies to maintain a uniform brand experience. They set the standards for products, services, and operations, ensuring that customers receive the same quality regardless of location.
  • Financial Benefits: Companies can grow without making large investments in new outlets. Franchisees bear the initial setup costs and pay franchisors royalties, giving the parent company a steady revenue stream.
  • Local Market Penetration: Franchisees often have a deep understanding of their local market. This local expertise can lead to strategies better tailored to the region, increasing the likelihood of success.

Understanding the Franchise Business Model

what is a franchise

Any enterprise of this type has some big advantages. It’s a ready-made business opportunity that comes with brand recognition. And quite often there’s a marketing strategy already in place. The business method is good to go. There is a process in place, like operating manuals that ensure quality control.

Here’s more good info from the Small Business Administration. It covers aspects like ongoing royalties and a one-time initial fee. Don’t forget there are some guidelines from the FTC. They provide the info needed to make a good decision called the Franchise Rule.

Most franchise opportunities involve the following parts.

The System

This is where you need to start making some decisions. Franchises come in different types that can be called systems. Product distribution franchising is called the traditional one. There’s also business format franchising which uses different formats.

The first one is one of the more popular franchises. The franchisee sells products supplied by the franchisor under the brand’s trademark.

Business format franchises are services involving the entire business format. That includes the company’s operating methods like day-to-day management. The franchisor’s brand which includes logo and trademarks is also used.

The Franchise Disclosure Document

what is a franchise

This is another part of the business an established brand needs you to look at. This is a legal document given to people who are interested in purchasing American franchises. The previous document was revised by the Federal Trade Commission in 2007. The Franchise Disclosure Document (FDD) provides clear roles between the franchise and prospective franchisees.

Due Diligence

what is a franchise

Franchises are like any other type of enterprise in at least one big way. Due diligence is important before you get started. As a potential small business owner, here are a few things you need to know. Remember the brand can be considered the most valuable asset.

  • Take a good look at the franchise system. Start with a self-assessment that takes a good look at your abilities, assets, and skills. You can start out by matching what you find out with specific opportunities. Look at different franchise systems for corporate culture, rewards, marketing, communications training, and other features that match you.
  • Client satisfaction is an important part of owning a franchise. But you need to know about your annual gross revenue, net owners profit, and personal salary.
  • You’ll also need to take on a thorough business plan. This has to lay out the goals of your franchise including cash flow projections, marketing strategies, and employment numbers.
  • Reviewing the Finance Disclosure Document (FDD) is also important. This is loaded with all kinds of insider information that can help you make a decision. Like how the system’s brand standards operate.

The Franchise Agreement

This is a legally binding agreement every franchisee needs to sign. Franchisor licenses of this type cover a lot of ground. Like the location and territory you can work in and how you’re expected to run your franchise. It also includes initial franchise fees, training, and ongoing support.

Best to have a lawyer look this over. The legalities of a franchisee’s business can be tricky.

Franchise Fee and Costs

what is a franchise

Buying a franchise means paying an initial fee. The franchisee pays this to access trademarks, intellectual property, branding, and licenses. It unlocks the door to the franchise system. These can range from $20,000-$50,000 according to the SBA.

There are more fees to pay, like royalties and other marketing fees. These are often added to a franchisee’s enterprise. Royalties are collected from the owner on a monthly basis. They are based on a percentage of revenue.

Mutual Support

Supportive networks are an important feature. Peer support through forms as well as mentoring and buddy programs are helpful. Here’s a place to get started with Jimmy John’s gourmet sandwiches. The UPS Store has a link to webinars.

How to Become a Franchisee

what is a franchise

If you’re looking to start an enterprise through franchise investment, there are a few steps. You can choose the type you want, submit an inquiry, and then an application. The final part of the process involves training, guidance, funding data, and leasing requirements

What Is the International Franchise Association?

This is a trade group that works through public policy and government relations to advocate for franchising.

What Are the 5 Types of Franchises?

There are different types to choose from when you consider this business model. A job franchise example would be event planning.

Computers and appliances come under the product franchise banner. Most US retail sales are here.

A business format franchise works under the company’s brand. Think fast food, fitness, and retail. Other types include an investment franchise ( hotels and big restaurants) and a conversion franchise. It’s a kind of hybrid whereby an existing company gets converted to a franchise. Florists and electricians fall into this category.

What Is an Example of a Franchise Business?

A commercial cleaning franchise is a good example. Take a look at the three big performance indicators. They are average sales, average profits, and average sales to investment ratio. Get this number by dividing sales by how much money you put in at first. A 2:1 ratio is good. It means for every dollar you invest, the gross sales equal two dollars.

Put all that together and you’ll see that JAN-PRO tops a list of the best commercial cleaning services.

Another good example is Sport Clips. It’s an award winner.


  • See our Franchise Guide
  • Is a Franchise Right for Me?

Image: Envato Elements

This article, "What is a Franchise?" was first published on Small Business Trends



By: Rob Starr
Title: What is a Franchise?
Sourced From:
Published Date: Mon, 18 Sep 2023 10:00:02 +0000

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