Franchising is a legal business model that allows entrepreneurs to grow their brand through licensed, independently owned business locations. It is used by more than 770,000 businesses in the U.S. and accounts for over 8.4 million jobs. This guide explains how franchising works, the parties involved, and why it's one of the most powerful tools for business expansion.
What is Franchising?
Franchising is a method of business expansion that allows a business owner (the "franchisor") to license their brand, systems, and trademarks to other independent business owners ("franchisees"). These franchisees operate their own locations under the franchisor’s brand using a uniform set of standards, marketing, and operational procedures.
Franchising is built on a legal foundation. The key legal documents are the Franchise Disclosure Document (FDD) and the franchise agreement, which outline the terms of the relationship, fees, and legal obligations.
How Franchising Works
In a franchise relationship:
- The franchisor provides the brand, training, systems, and support.
- The franchisee invests capital and operates their business under the franchisor’s brand.
The legal agreement that governs the relationship is the franchise agreement, and the franchisor must disclose detailed information to the franchisee through the FDD at least 14 days before signing any contracts or accepting payment.
Benefits of Franchising
For business owners (franchisors), franchising allows for:
- Faster expansion with lower capital investment
- Revenue from initial franchise fees and ongoing royalties
- Motivated owner-operators who have skin in the game
For franchisees:
- Ability to start a business with an established brand and system
- Reduced risk compared to launching independently
- Access to support, training, supply chain, and marketing tools
Types of Franchises
There are two main types of franchise structures:
- Business Format Franchises (most common)
- The franchisee adopts the entire business system, brand, and operations.
- Product Distribution Franchises
- The franchisee primarily distributes the franchisor’s product but may not adopt the full operating system (e.g., beverage distributors).
Who Regulates Franchising?
Franchising is regulated at both the federal and state levels:
- The Federal Trade Commission (FTC) regulates franchise sales through the Franchise Rule and requires franchisors to disclose an FDD.
- Many states require registration or notice filings before you can legally offer or sell franchises.
History of Franchising
Franchising dates back to the 1800s with Isaac Singer’s sewing machine distribution model and Martha Matilda Harper’s chain of hair salons. Over time, franchising evolved into a dominant business model, spanning industries like:
- Restaurants
- Hospitality
- Automotive services
- Health and wellness
- Business services
By the 1950s and 60s, iconic brands like McDonald’s, KFC, and Dunkin' helped solidify franchising as a global growth engine.
Examples of Franchise Businesses
Today, franchising powers some of the world’s biggest and most recognized brands. Examples include:
- Food & Beverage: McDonald's, Domino's, Dunkin'
- Retail: 7-Eleven, Ace Hardware, The UPS Store
- Hospitality: Marriott, InterContinental Hotels
- Real Estate: Century 21, RE/MAX
There are more than 770,000 franchise establishments in the U.S., employing over 8 million people.
Want to Franchise Your Business?
Franchising your business requires legal documents, strategic planning, and compliance with state and federal laws.
Start by understanding the full process: → Learn how to franchise your business
Or, if you're looking for legal and growth support: → Explore our Franchise Legal Services
Summary
- Franchising is a legal method of growing a business through licensed, branded locations.
- It’s governed by federal (FTC) and state laws.
- Franchising offers growth potential for franchisors and startup support for franchisees.
- The FDD and franchise agreement are critical legal documents.
- To franchise, you must legally structure your offering and prepare for growth.
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