Franchise Basics

Franchise Basics: What Is A Franchise?

What Is A Franchise? 

As someone in franchising the question constantly comes up, what is a franchise? This is definitely not the definitive answer but we will do our best to provide perspective.  

History

Believe it or not Franchising is not a new concept. Even though Franchising probably brings up images of McDonals 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 franchising 



all 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 hosting markets.



These type of commercial activities continued through the ages. Another historical example would be in 1606 when King James I granted rights to the Virginia London Company to establish the colony of Virginia between the 34th and 41st latitudes in the New World. 1-http://www.historyisfun.org/visitus/documents/LifeatJamestown.pdf

Now that we understand where the terminology came from. The first modern example of Franchising started with Isaac Singer. He was an inventor that created a fantastic 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 sell Singers machines (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). 

In the modern era things are a bit more exact. 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 (many business models are similar). In the United States franchising is regulated by the Federal Trade Commission (FTC) and they provide their own definition:

According to the FTC:

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