What makes a franchise

The best franchisors are the best communicators. Also, in today's market, with financing options so limited, the great franchisors are doing everything in their power to keep their franchisees' total investment low and to help franchisees reduce expenditures wherever possible.

Last but not least, great franchisors have the very best training programs to get franchisees up to speed rapidly, and they never stop supporting those franchisees throughout the life of their business.

Joel Libava, The Franchise King : Great franchisors have an uncanny ability to select great franchisees. It's not by chance, either.

They get to know their current franchisees. They find out what makes them tick, and then find out how they become and stay successful. On a similar note, great franchisors are usually pretty picky about who they award franchises to.

The best companies that I work with have the courage to turn down franchise candidates they feel would turn out to be average franchisees at best. And great franchisors are willing to invest in their systems. Both are costly and unnecessary mistakes to make. The Federal Trade Commission's definition of a franchise is provided in Section The franchisor generally provides operating manuals, training, brand standards, quality control, a marketing strategy, site location assistance, and more.

Both companies license their intellectual property, which includes their trademarks and business systems. As you might notice from the history of both brands, their products and services have dramatically changed over the years, and the structure of a business format franchise allows them to accomplish this easily.

Customers decide which business to shop at and how often to frequent that business based on what they know, or like, about the brand. They just want to obtain the products and services for which the brand is known.

When working with a good franchisor, franchisees receive the tools and support they need to live up to system standards and ensure customer satisfaction. Franchisors expect consistent execution of the company's brand standards at each location, regardless of whether the location is company-owned or franchisee-owned.

Franchisors invest a lot of time, energy, and financial resources in developing and supporting their brands, and in the consumer's mind, a franchisor's brand equals the company's reputation. Successful franchisors enforce system standards with franchisees, because they want to ensure that customers are satisfied each and every time they shop at a franchised location.

The franchisor also needs to protect the equity of the brand, as well as other franchisees sharing the brand. Franchisors provide not only the menu of established products and services but also an operational system and brand that have already proven themselves.

In successful franchise systems, the franchisor and franchisee work together for mutual benefit. There are numerous types of franchises today with an estimated different industries that utilize franchise structures. While the largest portion of franchises is in the food industry, there have also been other franchise opportunities in the field of home health care and other medical service markets.

In legal terms, a franchise involves a business owner granting a license to another business owner. The licensed business becomes a franchise and falls under the terms and regulation of the license agreement. With the license, the franchisor will be allowing the new business to use its:. Not only will the franchisee be allowed to use the intellectual property and material of franchisor but they will also receive basic business support from them to be able to run the business up to the standards of the brand.

In exchange for all this, the franchisee will most likely pay a one-time fee for the licensing as well as an ongoing royalty. You won't need to spend resources getting your name and product out to customers. The franchise business model has a storied history in the United States. Singer Company—developed organizational, marketing, and distribution systems recognized as the forerunners to franchising. These novel business structures were developed in response to high-volume production and allowed McCormick and Singer to sell their reapers and sewing machines to an expanding domestic market.

The earliest food and hospitality franchises were developed in the s and s. Howard Johnson Restaurants opened its first outlet in , expanding rapidly and paving way for the restaurant chains and franchises that define the American fast-food industry until this day.

There are more than , franchise establishments in the U. Before buying into a franchise, investors should carefully read the Franchise Disclosure Document, which franchisors are required to provide. This document contains information about franchise fees, expenses, performance expectations, and other key operating details.

Franchise contracts are complex and vary for each franchisor. Typically, a franchise agreement includes three categories of payment to the franchisor. First, the franchisee must purchase the controlled rights, or trademark , from the franchisor in the form of an upfront fee.

Second, the franchisor often receives payment for providing training, equipment, or business advisory services.

Finally, the franchisor receives ongoing royalties or a percentage of the operation's sales. A franchise contract is temporary, akin to a lease or rental of a business. It does not signify business ownership by the franchisee. Depending on the contract, franchise agreements typically last between five and 30 years, with serious penalties if a franchisee violates or prematurely terminates the contract. In the U. The Franchise Rule is a legal disclosure a franchisor must give to prospective buyers.

The franchisor must fully disclose any risks, benefits, or limits to a franchise investment. This information covers fees and expenses, litigation history, approved business vendors or suppliers, estimated financial performance expectations, and other key details.

This disclosure requirement was previously known as the Uniform Franchise Offering Circular before it was renamed the Franchise Disclosure Document in There are many advantages to investing in a franchise, and also drawbacks.

Widely recognized benefits include a ready-made business formula to follow. A franchise comes with market-tested products and services, and in many cases established brand recognition. If you're a McDonald's franchisee, decisions about what products to sell, how to layout your store, or even how to design your employee uniforms have already been made.

Some franchisors offer training and financial planning, or lists of approved suppliers. But while franchises come with a formula and track record, success is never guaranteed.

Disadvantages include heavy start-up costs as well as ongoing royalty costs. By definition, franchises have ongoing fees that must be paid to the franchisor in the form of a percentage of sales or revenue. This percentage can range between 4. For uprising brands, there are those who publicize inaccurate information and boast about ratings, rankings, and awards that are not required to be proven. So, franchisees might pay high dollar amounts for no or low franchise value.