What is a Franchise?

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.


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.

Understanding the franchise system is crucial for both franchisors and potential franchisees. It’s the framework within which the partnership operates, ensuring brand consistency while allowing for localized strategy and execution. Here are the components that define a franchise system:

  • The Business Format: Beyond just selling products or services, franchising is about replicating a successful business model. This includes not only the brand’s visual identity but also its customer service ethos, operational efficiency, and market positioning.
  • Operational Blueprint: Franchisors provide a comprehensive operational manual—essentially the DNA of the business—that covers everything from staff training to customer engagement, inventory management, and marketing. This blueprint is the franchisee’s guide to replicating the brand’s success in their locale.
  • Ongoing Support and Training: The relationship between franchisor and franchisee is dynamic. Franchisors offer continuous training and support to ensure franchisees are up-to-date with the latest brand standards, operational improvements, and market strategies.
  • Investment and Fees: The financial commitment from franchisees includes an initial franchise fee, ongoing royalties, and possibly marketing levies. These investments grant the franchisee the right to operate under the brand’s name and access the franchisor’s resources.

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.

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.

Expanding Your Business Reach Through Franchising

Franchising is a strategic approach that allows businesses to expand their brand and operational footprint without the hefty investments typically associated with opening new locations. It’s a mutually beneficial relationship between franchisor and franchisee, enabling rapid market penetration and brand growth. Here’s a closer look at how franchising can transform a business landscape:

  • Rapid Brand Expansion: Franchising is a lever for growth, propelling your brand into new territories with the local expertise and investment of franchisees. It’s about building a cohesive network that shares a common goal: to make the brand resonate across diverse markets.
  • Lowered Expansion Risks: Franchisees bear the brunt of the financial risks associated with establishing new outlets. This setup allows the franchisor to focus on broader strategic goals, such as brand innovation and market leadership, while franchisees navigate the local operational challenges.
  • Quality and Consistency: A franchise network thrives on uniformity. Franchisors provide the playbook—brand guidelines, service standards, and operational protocols—to ensure every customer encounter reflects the brand’s core values, regardless of location.
  • Streamlined Financial Model: The franchise model is financially attractive. Franchisees fund the initial setup and ongoing operations, paying royalties to the franchisor. This creates a steady revenue stream for the franchisor while empowering entrepreneurs to run their businesses under a proven brand.
  • Leveraging Local Insights: Franchisees bring invaluable local market knowledge to the table. Their understanding of regional preferences and challenges enables the network to adapt and thrive in varied environments, ensuring the brand’s relevance and competitiveness.

Navigating the Franchise Landscape: Insights and Considerations

For entrepreneurs considering a franchise, the journey involves thorough research, due diligence, and strategic planning. Here’s how to navigate the franchise landscape:

  • Self-Assessment: Evaluate your strengths, weaknesses, and business aspirations. Align these with potential franchise opportunities to find a match that leverages your skills and meets your goals.
  • Market Research: Dive deep into the franchise system you’re considering. Understand its market positioning, competitive advantages, and the support system for franchisees.
  • Financial Planning: Develop a detailed business plan that outlines your financial projections, marketing strategies, and operational goals. Consider the total investment required, including franchise fees, setup costs, and working capital.
  • Legal and Regulatory Compliance: Review the Franchise Disclosure Document (FDD) carefully with legal counsel. Understand your rights and obligations under the franchise agreement, including territory rights, brand usage, and termination conditions.
  • Building a Support Network: Leverage the franchisor’s network for training and support. Engage with existing franchisees to gain insights into the business’s day-to-day operations and challenges.

The Future of Franchising: Trends and Opportunities

As the business world evolves, so does the franchise model. Emerging trends indicate a shift towards technology integration, sustainability, and personalized customer experiences. Franchises that adapt to these trends not only stay relevant but also lead the market in innovation and customer satisfaction.

  • Technology and Innovation: Franchises are embracing digital transformation, leveraging technology to streamline operations, enhance customer experiences, and drive efficiencies.
  • Sustainability and Social Responsibility: Consumers are increasingly aligning with brands that demonstrate environmental stewardship and social responsibility. Franchises that incorporate these values into their operations gain a competitive edge.
  • Customer-Centric Strategies: Personalization and customer engagement are at the forefront of modern franchising. Brands that excel in creating unique and memorable customer experiences will thrive.

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

Franchising: Key Takeaways

Franchising is a strategic pathway to business expansion and entrepreneurship. It offers a balance of brand consistency with local market adaptability, fueled by a collaborative partnership between franchisor and franchisee.

Whether you’re a business looking to franchise your brand or an entrepreneur seeking to invest in a franchise, understanding the nuances of the franchise model is key to unlocking its potential.

With the right approach, franchising can be a win-win, driving growth, innovation, and customer satisfaction across the board.

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.


Image: Envato Elements

Rob Starr Rob Starr is a staff writer for Small Business Trends and has been a member of the team for 7 years. He is a graduate of Ryerson University in Toronto with a Bachelor of Journalism degree. His print credentials include employment with various Toronto area newspapers and three works of fiction: The Apple Lady (2004), Creekwater (2006) and Sophistry By Degrees (2008) published by Stonegarden Press In California.