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More in depth information about franchising

Of all the alternatives for successful business expansion, franchising has become the most popular option. Although government regulations tend to determine this choice, there are other important reasons for its popularity. Unlike any other form of expansion franchising goes beyond the contractual agreement to strongly incorporate business and human considerations.

The franchisor is the creator of the business concept with the desire to expand, while the franchisee is the 'partner' who seeks training and support beyond product knowledge to successfully operate a business. Typically franchisees have never owned a business before and they want and/or need to be trained on how to operate the entire business effectively. Furthermore, franchisees normally want to focus on the daily operations of the business without having to worry about product and/or service research and development. These considerations make for a unique relationship where franchisees are "in business for themselves but not by themselves;" and where they take care of today while franchisors take care of tomorrow.

This unique relationship requires that companies deciding to franchise enter a new business. Whether the original business was bakery, a consulting practice, sandwich shop or home improvement service, the franchisor now will be in the business of recruiting, training and supporting franchisees.  The new franchisor now will have to direct attention to the protection and promotion of their brand names, not only for their own future benefits but also for the benefit of all franchisees. Additionally the franchisor's job will now include planning and preparing for the future, staying ahead of the competition, researching and creating new products and services that will ensure their position in the market. In other words, the new franchise company's mission will now have to incorporate ensuring a prosperous future for its franchisees and the brand.

In exchange for the rights and continuing support provided by the franchisor, the new franchisee normally pays initial fees and agrees to pay ongoing monthly royalty fees, sometimes also called management fees. In some instances, franchise companies are given discounts from suppliers for the purchases of product by franchisees. They may also benefit from the mark-up of products they manufacture and sell to franchisees. It is also quite common for franchisees to be required to contribute monthly to national advertising funds.

When people buy a franchise, they are not purchasing a business; rather, they are simply acquiring the rights to benefit from someone else's efforts. In other words, franchisors have invested resources to build a successful business, which, in turn, they license to franchisees. Therefore franchising provides opportunities for individuals seeking alternatives to traditional employment without having to assume all of the risks associated with self-employment. In other words, franchisees receive the right to participate in someone else's success without having to venture alone into an unknown area of business risk.

In distinguishing between a franchise and all other “business opportunities,” there are four distinct elements that set franchising apart from other methods of doing business. All of the following four elements must be present in order for a franchise to exist:

• The rights to use the company's registered trademarks and logos must be granted and required to be used and protected;
• Extensive initial and ongoing training and support must be offered;
• A complete "Business Format System" for operating the business must exist and made available and must be trained, and;
• Payments of an initial franchise fee, continuing royalty (or management services) fees, and possibly monthly national advertising contributions must occur.

The primary difference between franchising and all other alternative distribution methods is the inclusion of a "Business Format System." The Business Format provides franchisees with the "how to" for starting and operating the franchised business. It includes Operation Manuals, Training and Procedures Guides, and often the accounting systems to record and monitor the performance of the business.

As more formally definition of franchising by the International Franchise Association summarized the above information:

Business format franchising is the establishment of a distribution network of businesses operating under a shared trademark or trade name, with each franchisee paying the franchisor for the right to do business under that name, and operating under a specified, controlled business method or format, and in return receiving significant initial and continuing services and support from the franchisor.