Franchising Fundamentals – Basic principles to know

For countless people, franchising has changed their lives from employee status to business ownership. But only those who understand the fundamentals of franchising are likely to succeed.

By Tom Portesy, President, MFV Expositions LLC

Franchising doesn’t include any guarantees for success, but it works best when you understand and accept some basic principles about the concept. Here’s what you need to know:

It’s a methodology, not an industry

Franchising is a methodology. It’s the methodology of choice for business owners who want to open additional units of their business using other people’s time and money. Don’t confuse franchising with traditional corporate ownership, a la Wal-Mart or JC Penney’s, where the corporation owns and controls all of the units. Franchising is also not a joint venture, which is yet another methodology. And, franchising is not an industry, because businesses in 75 major industries use franchising as their method of expansion.

The franchisor owns the brand

In franchising, the person or entity that owns the brand trademark and the intellectual property, i.e., operating systems, marketing materials, training programs, etc., is called the franchisor. The franchisor establishes the terms and conditions for franchisees to own and operate units of the franchise company, or what’s referred to as a franchise network. The franchisor is responsible for developing the operating systems that run the business, and transferring the knowledge included in those systems to franchisees through training and support.

Franchisees are licensees

Franchisees are licensed by the franchisor to operate a unit (or units) of the franchise brand in a specific way, for a specific period of time (usually 10 years, but it could be shorter or longer), and in a specific location. The license grants the franchisee the right to represent the brand and to use the franchisor’s intellectual property. However, franchisees never own the brand or the intellectual property. Franchisees usually need to quality for a license. Once the license expires, the franchisee may be able to renew for another specific period of time. Franchisees almost always own the equity in their businesses, and they may profit from sale of the equity when they choose to terminate their franchise relationship.

Franchisees must qualify

Franchisees must meet the franchisor’s qualifications, which include paying the upfront franchise fee, which may be as low as a few thousand dollars or as high at $50,000 or more. The franchise fee gives the franchisee access to the franchisor’s intellectual property, training, and support. Franchisees also pay an ongoing royalty fee, which is usually a percentage of gross sales per unit. Some franchisors may also require training or marketing fees.

Franchisors disclose information upfront

In the United States, franchisors are required by Federal law to provide prospective franchisees with a Franchise Disclosure Document (FDD). The document forces franchisors to disclose a variety of pertinent information about the franchise company, its ownership, the brand, and the operations of the business. Prospective franchisees are encouraged to read the document carefully and thoroughly.

It’s a three-way proposition

A successful franchise requires three essential components:

  1. A successful brand that consumers will support
  2. A franchisor that continues to keep the brand relevant to consumers while thoughtfully selecting, training and supporting franchisees
  3. Dedicated franchisees who are committed to building and operating the franchise unit/s

Take away any one of these three requirements, and failure is the likely result.

For countless people in the USA and abroad, franchising has been the methodology that changed their lives from employee status to the status of business ownership. But only those individuals who understand the fundamentals of franchising are likely to succeed.

About the Author
Tom Portesy is President of MFV Expositions, overseeing a staff of over thirty professionals currently producing three franchise events in the United States, two franchise events in Mexico (including one of the world’s largest) and franchise events in the United Kingdom and Grand Bahama. Tom is responsible for the global network of partners involved in MFV’s growing international online business. Tom works closely with the International Franchise Association and many franchise associations around the world and has participated as a panelist and moderator in countless seminars and symposia.

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