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Chapter 1: Introduction to Franchising: What Every Entrepreneur Should Know

Franchising is widely recognized as a great wealth builder, but its role in the business world is much further-reaching.

By Morgan Wood1851 Franchise Contributor
Updated 4:16PM 06/01/23

In the U.S., the Singer Sewing Machine Company is often linked to franchising. However, the company did not offer franchises as we view them today. Instead, in 1851, it grew by constructing local offices that were independently managed by their respective employees. According to the International Franchise Association, the first modern-day franchisor was likely Martha Matilda Harper, a Canadian-American who began to franchise the Harper Method Shops in 1891.

By the time the franchise model that we know today was up and running, the Second Industrial Revolution had already started (in the 1870s). This created the perfect environment for the franchise industry to explode with manufacturing, automotive and beverage industries embracing the model. 

Now, as the model has increased in popularity over the last 100-plus years, franchises are everywhere. In the U.S. alone, there are around 790,000 franchise establishments.

“I think when people finally start to look for a business, they’re looking within a certain field for any that are available to purchase from an existing listing standpoint,” explained Tipton Shonkwiler, president of Accurate Franchising and managing director of the Consulting Division of United Franchise Group. “That’s when they uncover that the business they’re interested in is actually a franchise.”

What Franchising Means for Business

Franchises benefit all sides of the business world. For franchisees, the model makes business ownership far more accessible, meaning individuals can bring passion, curiosity and a reasonable initial investment to the table to launch their entrepreneurial journeys rather than working tirelessly (and often alone) to build a brand from the ground up.

“Franchising in general has been a great wealth-creator at both the franchisor and franchisee level,” said Shonkwiler. “It’s a great business model; it really is. It’s a great way to exit, as well. If someone is looking to develop their brand into a franchise, that’s a great way to have something to do for 10–15 years, and it places them in a much greater place to exit later on.”

For franchisors, the ability to leverage the passion and dedication of these same local owners is also a great advantage. Many giant brands, though well-resourced, simply cannot expand at the rate they do when offering franchises. Plus, having a local owner with boots on the ground can make a huge difference in local consumers’ experience of the concept. 

What Is Franchising, Really?

In the simplest terms, the franchise business model is based on a franchise agreement. Though the details of said agreement will vary between brands, the basis remains steady: the franchisee pays a franchise fee and ongoing royalties in addition to their baseline time and capital investments. In exchange, the franchisor provides support, expertise and brand recognition to drive each local owner’s growth.

The key components of the franchise model include:

  • Application Process: To protect the strength of the brand, franchisors must carefully evaluate prospective investors. Most application processes will include questions about the prospect’s net worth, liquidity, financing plans and history with business ownership. Some franchisors will also spend a substantial amount of time or effort evaluating how the prospect may fit with the existing culture of the brand.
  • Franchise Disclosure Document (FDD): Franchisors typically provide this document during the due diligence stage. Each year, FDDs are put together based on the brand’s performance and any changes that happened in the previous year. Often, a franchise attorney will help with this process. Once complete, the FDD is an invaluable resource for prospects.
  • Franchise Agreement: If everything goes well and all parties agree with the partnership, the franchisee will be offered a franchise agreement. This is the document they will sign that serves as a binding contract between them and the franchisor. These agreements typically outline the rights and responsibilities of the franchisor and franchisee in each respective role.
  • Training and Support: As a crucial part of the franchise model, the franchisor should provide training and other support programs or manuals to the franchisee. Commonly covered topics include leadership, marketing, brand standards, operational best practices, hiring, sales and business development.

“Franchisees can get started a lot quicker because of some of those benefits,” said Shonkwiler. “Certainly, someone would also want to consider how they are with operating someone else’s business model. What kind of mindset do I have? Do I align with that? They need to weigh that against how much it would cost and how much time it would take from a ramp-up standpoint to start on their own.”

Who Wins in Franchising?

Optimally everyone wins in franchising. With a healthy business model, franchisors can embrace rapid growth while supporting the entrepreneurship of local business owners. When a franchisor takes the time to evaluate its own ability to develop support systems prior to launching the franchise model, the system is more likely to succeed. For entrepreneurs looking to expand their own existing business, franchising should not be viewed as an “easy out” though. While the franchise model is a great driver for growth, it is not without demands.

“Some franchisors go out there and start selling franchises,” said Shonkwiler. “They’re focused on that but not focused on taking care of what they’ve already sold. You never want a franchisee to feel like they’re on an island. You want to have that ongoing engagement between the franchisee and franchisor; that’s how you properly do it.”

Maintaining engagement and keeping lines of communication open benefits both franchisees and franchisors. With a strong relationship and alignment of goals, franchisees can serve as powerful advocates for franchise brands within their own communities, driving both parties toward success.

“The franchisor also needs to get to know someone and make sure they’ve laid out the company vision and what they want in a franchisee so that they can properly set that tone,” he added. “In a franchise agreement, you’re entering into, sometimes, upwards of a 35-year agreement, so you really want to make sure you’re making the right decision on both sides of the fence.”