Define a Franchise: What is it?

This article is about defining what a franchise is and how that applies to you and your start up or small business efforts.

We will look at the definitions and what they mean. Also take a look at the various types of business franchise. It seems the franchise industry has something for every size of business ambition. From low investment work at home to whole country Master Franchise.

The standard way to define a franchise is to think of a business like McDonald’s or Subway and know that the McDonald’s Corporation does not own that store. A local or regional business investor or entrepreneur owns the location. But his ownership has significant restrictions on what the local business owner can or cannot do?

The Franchiser (also know as the Franchisor) is the company that owns the trademark and rights to the business name and business system.

This Franchiser then offers to sell use of the business name and business systems to a Franchisee (that would be you). This sale gives the franchisee the use of a proven business system, but on a limited market or geographic area. Furthermore, the franchisee is limited by the franchise agreement to certain things he or she can and cannot do.

The main advantage to the Franchiser is that they get to rapidly expand their business without all the working capital required if the locations were all company owned. The local Franchisee uses it’s own money to set up and market the new business. Also, the local franchisee owner also has to hire and manage all the workers in each of it’s location.

So you can see how easily a franchise company can grow nationwide through this method of doing business.

The franchise agreement comes with investment costs and ongoing fees. It is through these revenue streams that the seller (Franchiser) makes their income.

Three General Types of Franchise

1. Single location or small number of multiple locations – for example you may buy a franchise to operate a single Subway location, or several in your town / city.

2. Master Franchise – Covering a larger region, county, state, or even whole countries. In this situation you would both open franchised location and be able to sell franchised locations within your designated Master Franchise area.

3. Licensed or Manufacturing Franchise – Here you get the rights to manufacture a product for resale to the wholesale trade. You must follow the Franchiser’s specifications and sales requirements.

When we try to define a franchise it is a somewhat complex question. The franchise definition really depends on the type you are seeking and your level of investment in the business model.

However, in all cases you must carefully weigh the cost and restrictions of a franchise business (as spelled out in the franchise agreement) against the benefits promised by the franchiser.

Possible Benefits of a Franchise Business

• Proven Business Systems
• Established Brand Name
• National and / or Regional Advertising
• Home Office Support
• Much Shorter Learning Curve
• Start-up Business Training
• Volume Purchasing Prices

Possible Negatives of a Franchise Business

• Lack of Support from Home Office
• Competition from the Same Brand
• High Initial Costs
• High Ongoing Royalties and Fees
• Unilateral Contract Changes from The Franchiser
• High Annual Productivity Requirements – This Could Cause Loss of the Franchise
• After Years of Paying Fees Many Franchisees Begin to Feel Resentment Toward the Franchise Company

Your Business Mentor Ray has owned several franchise locations in the travel industry and in the financial service industry. I will be writing a continuing series of articles on all facets of being a franchise owner and sharing my experiences with you.

We will break down all the parts of the franchise agreement and discuss the parts that need you to understand with the help of your experienced franchise business lawyer.

Your thoughts and questions are welcomed on the Define a Franchise article.