Franchise Basics: What Is A Franchise?

April 22, 2020

, by

Joshua Kovacs

What is a Franchise

What is a franchise?

Franchising is a business model that has become increasingly popular in recent years. It involves one business, the franchisee, obtaining the right to use the branding and business model of another business, the franchisor, in exchange for a fee. This allows the franchisee to sell the franchisor's products or services under their own business, using the franchisor's established brand and business model.

Why is franchising so popular?

One of the major advantages of franchising is that it allows individuals to own and operate their own business without having to start from scratch. The franchisor provides the franchisee with a proven business model, training, and support, which can help them to succeed. This can be especially attractive to people who have always dreamed of owning their own business but don't have the experience or expertise to start one on their own.

Another advantage of franchising is that it can provide a consistent customer experience. Because the franchisee is using the franchisor's established brand and business model, customers can expect the same high-quality products and services no matter which location they visit. This can help to build customer loyalty and drive repeat business.

However, there are also some challenges to franchising. For one, the franchisee must typically make a significant investment in order to become a franchisee. This can include upfront costs such as purchasing equipment and supplies, as well as ongoing fees such as franchise royalties and marketing fees. In addition, the franchisee must adhere to the franchisor's policies and procedures, which can limit their ability to run their business as they see fit.

Overall, franchising can be a great option for people who want to own their own business but don't want to start from scratch. It provides the support and resources of a larger company, while still allowing the franchisee to be their own boss. However, it's important to carefully consider the potential costs and limitations before making the decision to become a franchisee.

Why do businesses franchise?

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.

Is franchising regulated?

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. 

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

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