Franchising Definition & Meaning

A franchise (or franchising) is a method of distributing products or services involving a franchisor, who establishes the brand&#;s trademark or trade name and a business system, and a franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor's name and system. Technically, the contract binding the two parties is the &#;franchise,&#; but that term more commonly refers to the actual business that the franchisee operates. The practice of creating and distributing the brand and franchise system is most often referred to as franchising.

If you want to learn more, please visit our website.

There are two different types of franchising relationships. Business Format Franchising is the type most identifiable. In a business format franchise, the franchisor provides to the franchisee not just its trade name, products and services, but an entire system for operating the business. The franchisee generally receives site selection and development support, operating manuals, training, brand standards, quality control, a marketing strategy and business advisory support from the franchisor. While less identified with franchising, traditional or product distribution franchising is larger in total sales than business format franchising. Examples of traditional or product distribution franchising can be found in the bottling, gasoline, automotive and other manufacturing industries.

Franchising Is About Relationships

Many people, when they think of franchising, focus first on the law. While the law is certainly important, it is not the central thing to understand about franchising.  At its core, franchising is about the franchisor&#;s brand value, how the franchisor supports its franchisees, how the franchisee meets its obligations to deliver the products and services to the system&#;s brand standards and most importantly &#; franchising is about the relationship that the franchisor has with its franchisees.

Franchising Is About Brands

A franchisor&#;s brand is its most valuable asset and consumers decide which business to shop at and how often to frequent that business based on what they know, or think they know, about the brand.  To a certain extent consumers really don&#;t care who owns the business so long as their brand expectations are met. If you become a franchisee, you will certainly be developing a relationship with your customers to maintain their loyalty, and most certainly customers will choose to purchase from you because of the quality of your services and the personal relationship you establish with them. But first and foremost, they have trust in the brand to meet their expectations, and the franchisor and the other franchisees in the system rely upon you to meet those expectations.

Franchising Is About Systems and Support

Great franchisors provide systems, tools and support so that their franchisees have the ability to live up to the system&#;s brand standards and ensure customer satisfaction.  And, franchisors and all of the other franchisees expect that you will independently manage the day-to-day operation of your businesses so that you will enhance the reputation of the company in your market area.

When selecting a franchise system to invest in, you want to evaluate the types of support you will be provided and how well the franchisor is managing the evolution of the products and services so that it keeps up with changing consumer expectations.  Some of the more common services that franchisors provide to franchisees include:

• A recognized brand name,

• Site selection and site development assistance,

• Training for you and your management team,

• Research and development of new products and services,

• Headquarters and field support,

• Initial and continuing marketing and advertising.

  With competitive price and timely delivery, THE MIDI. sincerely hope to be your supplier and partner.

You want to select a franchisor that routinely and effectively enforces system standards.  This is important to you as enforcement of brand standards by the franchisor is meant to protect franchisees from the possible bad acts of other franchisees that share the brand with them.  Since customers see franchise systems as a branded chain of operations, great products and services delivered by one franchisee benefits the entire system. The opposite is also true.

Franchising Is also a Contractual Relationship

While from the public&#;s vantage point, franchises look like any other chain of branded businesses, they are very different. In a franchise system, the owner of the brand does not manage and operate the locations that serve consumers their products and services on a day-to-day basis. Serving the consumer is the role and responsibility of the franchisee.

Franchising is a contractual relationship between a licensor (franchisor) and a licensee (franchisee) that allows the business owner to use the licensor&#;s brand and method of doing business to distribute products or services to consumers. While every franchise is a license, not every license is a franchise under the law. Sometimes that can be very confusing.

In the United States, a franchise is a specific type of licensing arrangement defined by the Federal Trade Commission and also by several states. In the United States a franchise generally exists when:

• The franchisor licenses a franchisee the right to use its trade or service mark;

• To identify the franchisee&#;s business in marketing a product or service using the franchisor&#;s operating methods;

• The franchisor provides the franchisee with support and exercises certain controls; and,

• The franchisee pays the franchisor a fee.

The definition of a franchise is not uniform in every state.  Some states for example, may also include a marketing plan or community of interest provision in the definition.  The definition of what is a franchise can vary significantly under the laws in some states and it is important that you don&#;t simply rely on the federal definition of a franchise in understanding any particular state&#;s requirements.

Put another way, in a franchise a business (the franchisor) licenses its trade name (the brand, such as BrightStar Care or Sport Clips) and its operating methods (its system of doing business) to a person or group operating within a specific territory or location (the franchisee), which agrees to operate its business according to the terms of a contract (the franchising agreement).  The franchisor provides the franchisee with franchising leadership and support, and exercises some controls to ensure the franchisee&#;s adherence to brand guidelines.

In exchange, the franchisee usually pays the franchisor a one-time initial fee (the franchise fee) and a continuing fee (known as a royalty) for the use of the franchisor&#;s trade name and operating methods. The franchisee is responsible for the day-to-day management of its independently owned business and benefits or risks loss based on his own performance and capabilities.

Investing in a franchise or becoming a franchisor can be a great opportunity.  But before you select any franchise investment and sign any franchise agreement, do your homework, understand what the franchise system is offering and get the support of a qualified franchise lawyer.

Find out more about franchising by visiting our frequently asked questions page here. 

Introduction to Franchising

Appeared in Franchise Canada Magazine

Definition of a Franchise

Franchising is a business relationship where a franchisor (a company or individual who owns the franchise system) grants a license to a franchisee (a company or person who contracts to use the franchise system) the right to use the franchisors brand and operating system for an initial fee (initial franchise fee). In return the franchisee provides a share of the income back to the franchisor (a royalty). The license is contractual and is usually for a fixed period of time. The franchisor selects candidates to become strategic-partners in implementing the business plan and selling products and services to the franchisor&#;s customers using the proven franchisors business model and/or their proprietary products. A franchise model has in place policies and procedures so as to create consistency from one franchise location to the other.

As a growth strategy it provides franchisors the ability to gain market share by increasing their points of distribution. Increased point of distribution results in greater exposure and brand awareness. Franchisors are able to grow and have committed individuals operating and driving the location. From a franchisees perspective, it allows the franchisee to get into business with support, a brand name and a proven business model. This helps to reduce the risks involved with getting into business.

It has become a part of almost every industry. Although people most often think of fast food when they think of franchising, it is also found in retail, service, automotive, business services, real estate and lodging.

There are several things that one must understand about a franchise. You are not buying the franchise. Instead, you are acquiring a license to operate a franchise. You do not own the name, but instead have a license to use the name. You do not own the business model, but instead have the rights to use the business model for a period of time. It is a little like being a tenant and renting. You don&#;t own the space you are renting, but instead have the use of the space for a period of time.

Uniformity is a fundamental principal to the success of a franchise. There must be consistency from franchise to franchise within a given business. By having the same product in similar outlets, with consistent levels of service, the franchise is able to build confidence in the mind of the customer and this drives people to the brand. Customers gravitate to what they know, what is familiar and what they trust. The uniformity is created through operating standards and procedures that are clearly documented in operation manuals. Franchisees are required to follow an operating system and use the same suppliers of product, take the same training. The system, suppliers and training are all designed to create a consistent experience to the end user of the product or service and thus create an expectation and impression in the mind of the customer.

The uniformity is enforced through a franchise license. This license gives you the right to use the brand and operating system. The license also comes with obligations, to follow the operating standards and systems, as clearly defined in the business model. If you fail to follow the standards you may loose your license. With compliance to the system it drives the market and enhances your investment. When you first look at a franchise agreement you may find it controlling and very one sided in favor of the franchisor. This is normal and required to allow the franchisor to control the integrity of the brand. As a franchisee, you must understand that you simply can&#;t do what you want. You are required to conform. The success of the system as a whole to build a brand is dependent upon consistency.

Although you can&#;t simply do what you want, strong franchise organizations value franchisees input and create advisory groups to provide feedback and input to the franchisor to assist in the strategic direction of the company. They view the franchisee and franchisor relationship as a partnership. A partnership in a strategic sense, not a legal sense. In franchising, it is not an equal partnership. The franchisor takes input but ultimately the franchisor has the final say. The franchisor acts as the senior partner in the strategic partnership. Franchisees are on the front lines and have strong knowledge of the needs of the customer. At McDonald&#;s it was the franchisees input that led to the development of the Egg McMuffin and the McFish sandwich. Strong franchisors listen and value the input from franchisees.

Franchising provides numerous benefits. Benefits often include;

• Becoming a part of an established brand
• Proven business model
• Mass purchasing power
• Cooperative advertising
• Operational support
• Training
• Ongoing research and development
• Test marketing of new products and services
• Easier access to financing
• Access to high profile locations

Hallmarks of a strong franchise include;

• Strong leadership
• Participative management with Franchise Advisory Councils
• Continuous training
• Evolving brand development
• Continuous improvement to the operating system
• Great communication
• A positive corporate culture

General Information on Franchise Fees

Franchise fees are typically paid for the use of the brand and the operating system. There is usually a one time initial franchise fee as well as an ongoing fee, called a royalty. The ongoing royalty may be a flat monthly or weekly fee or, more often is a percentage of the gross sales from the business. In addition, most franchise companies charge a fee for an advertising fund where the advertising dollars of the franchisees are pooled together to allow for franchisees to share the costs of national or regional advertising. By pooling the ad dollars together they are able to afford advertising that would not have been affordable otherwise.

Why do some have franchise fees and others do not?

The initial franchise fee will vary from $5,000 to $75,000. How much the initial fee is varies depending upon the amount of training and support that is provided to get the new franchised location up and running. In addition to the initial training and support, the initial franchise fee covers the cost of franchisee recruiting, territory analysis, site identification, grand opening launch, and some recovery of the franchise development costs. Typically the more established and recognized the brand of the franchisor the higher the initial fee.

On-going royalty fees will vary from 0% to 20% of gross sales. The amount will vary depending upon the level of on-going support and services that are provided by the franchisors. For example, some franchisors may provide a centralized call center with order taking. This requires a higher cost which is addressed with a higher royalty. Where no royalty is charged, it is basically build into product sales or sale of services in the form of mark-up or rebates on products. Typically the more involved the franchisor is on-going with the business operations, the higher the fee.

Franchisors must make some form of revenues and profit in order to provide on-going support and services. A royalty ensures that the franchisor has a vested interest in seeing you be successful for your success results in their success.

For more retail franchise opportunitiesinformation, please contact us. We will provide professional answers.