A Beginner's Guide to Franchising: How the Model Works

Franchising is a process in which an entrepreneur partners with a corporate brand to open a business. The franchisee owns and operates that location while using the franchisor's brand name, logo, products, services and other assets. This mutually beneficial strategy allows businesses to raise capital and grow market share. Simultaneously, prospective franchisees receive a path to business ownership that’s significantly less risky than starting from scratch. 

A business becomes a franchise by filing a Franchise Disclosure Document (FDD) and licensing its branding and operational model to other entrepreneurs. These entrepreneurs (franchisees) will open, own and manage their own locations with the brand. 

The franchisor provides the franchisee with a proven business concept, support, training and access to the brand. In return, the franchisee pays an initial franchise fee and ongoing royalties, contributing to the overall success of the franchise system.

Franchise Fee and Royalties

The franchise fee is an upfront payment that is made to a franchisor by an incoming franchisee in exchange for the right to replicate the business model and concept. Under the Federal Trade Commission, which defines franchising throughout the United States, a business can only be considered a franchise if the franchisee makes a payment to the franchisor of at least $500 (annually adjusted) either before or within six months of opening the business.

This fee varies widely, depending on the industry, brand recognition and the level of support provided by the franchisor. Additionally, franchisees typically pay ongoing royalties, usually a percentage of their sales, to the franchisor. These royalties fund continued support, marketing efforts and the overall growth of the franchise system.

Training and Support

One of the significant advantages of franchising is the training and support provided by the franchisor. Franchisees receive comprehensive training on operating the business, adhering to brand standards and managing day-to-day operations. Ongoing support may include marketing assistance, supply chain management, and access to new products or services. This support system is designed to ensure the success of each franchise unit while maintaining consistency across the entire franchise network.

Business Model Consistency

Maintaining consistency across all franchise units is a key part of the success of a franchise business model. That’s why franchisors provide detailed operating manuals and guidelines that outline the standards and practices to be followed by all franchisees. This consistency helps to build a strong and recognizable brand, which, in turn, contributes to customer loyalty and trust.

Legal Framework

Franchising is subject to legal regulations that are designed to protect both franchisors and franchisees. For example, franchisors are required to provide prospective franchisees with the FDD, which contains detailed information about the franchise system, including financial performance, fees and obligations. 

This dynamic business model offers entrepreneurs the opportunity to own and operate their own businesses while benefiting from the support of an established brand. The success of franchising relies on the collaborative efforts of franchisors and franchisees, each playing a crucial role in building a strong franchise system.