Franchise Basics

Franchise Basics: What Is A Franchise?

A franchise is a form of business arrangement where a business (the franchisor) provides the rights to another business or individual (franchisee) to operate under their name and utilize their IP and business procedures in exchange for upfront and ongoing fees. Franchise arrangements are all around us from gas stations to hair salons there are over 730,000 franchised businesses in the US alone.

Why is this business arrangement so popular?

Many businesses understand that in order for them to expand into new markets they need to partner with business people who know the local market better than them and have a vested interest in the success of their business, both of these issues are addressed with a franchise agreement. For entrepreneurs who buy franchises, they are a way to capitalize on another firms brand and business procedures. They allow entrepreneurs to share in the success of another brand while also getting to market more quickly than creating a concept from the ground up.

Franchise History

Believe it or not Franchising is not a new concept. Even though Franchising probably brings up images of McDonalds or Subway the concept has been around for hundreds of years. 

Considering the words Franchisee, Franchisor, and Royalty are used it should be no surprise that the concept of franchising began in medieval times. Lords would provide the rights to certain individuals to conduct commercial activities on their lands and they would owe a royalty in exchange for the right to operate in the lord's territory.

The first modern example of Franchising started with Isaac Singer. He was an inventor that created an advanced sewing machine and needed a scalable way of selling it. He created a business arrangement in which he would sell distribution rights to business people to sell his machines in specific geographic areas and a fee was paid up front for the rights to do so (Franchise Fee).

For many years franchising was any business arrangement in which someone was provided the right to use a firm’s business model and it’s marks for a prescribed period of time typically in exchange for up front fees and a continuing payment (Royalty). 

Many countries and their territories/states now regulate franchising and therefore provide a definition of what a franchise is to ensure there is no confusion (other business models like licensing are similar). In the United States franchising is regulated by the Federal Trade Commission (FTC) who define franchises as:

a commercial business arrangement is a “franchise” if it satisfies three definitional elements. 

Specifically, the franchisor must:

(1) promise to provide a trademark or other commercial symbol;

(2) promise to exercise significant control or provide significant assistance in the operation of the business; and

(3) require a minimum payment of at least $500 during the first six months of operations. 

So now that we know what a Franchise is, why would you buy one? 

When you buy a franchise, you are able to sell goods and services that have name recognition, utilize market tested operations, as well as receive training and support from an experienced party to help you succeed. 

Source: https://www.ftc.gov/system/files/documents/plain-language/bus70-franchise-rule-compliance-guide.pdf

If Interested in learning more about Franchising or how to buy one check out: 

https://www.ftc.gov/tips-advice/business-center/guidance/consumers-guide-buying-franchise

Joshua Kovacs is the CEO of Oakscale, where he leads strategy and development efforts by connecting multi-unit franchise operators and private equity to high growth, emerging franchise brands.
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