What is Franchising?
Many people talk about franchising but, what is franchising and what does it mean to franchise your business?
What is Franchising?
Franchising is a legal and business model that is used to grow an existing business and achieve multi-unit expansion. When you franchise your business you are licensing your trademarks, formalizing and documenting your business systems, and legally authorizing and licensing other individuals (your franchisees) to open new locations.
Your franchisees must follow the system requirements that you set. In exchange for your training, ongoing support, and the continued license to operate under your trademarks, franchisees will pay you fees in the form of an initial franchise fee and ongoing royalty fees.
Before you can offer or sell a franchise you need to comply with federal and state franchise laws. The franchise laws are designed to protect franchisees before they invest in a franchise and under these laws franchisors require franchisor’s to issue an Franchise Disclosure Document (“FDD”), disclose the FDD to franchisee candidates, register and file in the franchise registrations states, and comply with federal and state regulations. Watch the video below for more information.
Franchising as a Legal Relationship
The franchise laws were created to provide protection to investors by requiring a pre-sales disclosure process that involves the disclosure and registration of a FDD. What triggers the franchise laws and creates a franchise relationship is determined by federal and state franchise laws.
Under these laws, generally, a franchise relationship arises from a verbal or written agreement that involves the following elements:
- The license of a trademark.
- The payment of a fee.
- Control over what can and cannot be done in the business.
Many times, franchise relationships arise naturally. After many years of developing and operating a successful business it is quite normal that others may be asking about your success, how you’ve done it, and, even, if they could open up their own location. You may even be internally evaluating how to continue new locations.
The solution—compared to continued organic growth—is franchising. The way the franchise laws work is that once you grant another individual (1) a license to use your business name / trademarks, (2) you require that they pay you a fee for the right to operate a location under your brand, and (3) your agreements restricts what they can and cannot do in the business, i.e., what they can sell, suppliers that they must use, standards they must follow, etc., a franchise relationship is created and you need to comply with the franchise laws. If you are considering licensing, learn why licensing is not an alternative to franchising.
Franchising as a Business Relationship
As much as franchising is a legal relationship, it’s also a business relationship. Franchisees help you expand the reach of your brand and the markets that you serve. Your franchisees supply their own capital and efforts to open new locations and, in turn, you provide them with the initial training and on-going support to succeed.
When done correctly, franchising creates win-win relationships. As your franchise system grows, everyone should benefit from economies of scale, growing brand recognition, and ongoing system improvements.
As a franchisor, you grow new revenue streams consisting of initial franchise fees, ongoing royalties, and other system generated revenues. As a business relationship, franchising can help you scale and grow your business far beyond your current operations.
If you’re ready to scale and grow your business or you just want to learn more about franchising, access our Free Learn Franchising Videos or contact our team at (800) 976-4904, by email, or live chat.