What Is a Franchise?

Franchise is from the French word, franchir meaning to clear an obstacle or difficulty (which using someone else’s business system surely expedites). It refers to the use of another businesses proven system, its methods and trademarks, for a fee called a royalty. Franchisees pay to the franchisor for the right to start up a new business based on a proven trademark and system (operating methods) of doing business, as opposed to having to start a new business with its subsequent risks. The franchise in technical terms is the license between two businesses which gives another business (franchisee) the right to market a product or service using the trademark and system of another business (franchisor).

By definition, franchising is a market-expression method wherein a business enables, by a license (Franchise Agreement), another business to use its operating system and trademarks to distribute its goods and services in exchange for franchise fees and royalties.

Franchising is a legal relationship between a franchisor and a franchisee created by the Franchise Agreement. One of the essential features of this relationship is ongoing and continuing control by the Franchisor over the way in which the Franchisee operates the business.

The amended FTC Rule defines franchising as a “commercial business arrangement” which satisfies three definitional elements. Specifically, the franchisor must promise to provide a trademark or other commercial symbol, and give a promise to exercise significant control or provide significant assistance in the operation of the business; and require a minimum payment of at least $500 during the first six months of operations. Note however, most states will consider anything not meeting the required FTC Rule standards as a business opportunity.

It is important to know according to the FTC that the name given to the business arrangement is irrelevant in their determining whether it is a franchise. A franchise in their definition must have three elements to fit the definition of a franchise, regardless of what representations are made. Therefore, (according to the FTC Rule) if a seller of a business arrangement represents that it licenses its trademark, promises to provide significant assistance in the buyer’s business operation, and charges at least $500 during the first six months of operations, (even if in fact it does not) then the FTC will consider the arrangement as a franchise even if, the seller, has no trademark, means of control, or doesn’t provide assistance to the buyer. Remember, the key word here is, “represents”. Accordingly, a business could avoid FTC Rule coverage of its business arrangement simply by expressly prohibiting the buyer from using its mark.

It is also relevant to know when wishing to avoid becoming a franchise in the FTC definition is to know that the FTC defines significant types of control to include such areas as site approval, site design or appearance requirements, hours of operation, production techniques, accounting practices, personnel policies, promotional campaigns requiring franchisee participation or financial contribution, restrictions on customers and locale of operation.

Another stickler for the FTC definition is how the FTC defines significant types of assistance. They define significant types of assistance to include such areas as formal sales, repair, or business training programs, establishing accounting systems, furnishing management, marketing, or personnel advice, furnishing system wide networks and websites, and furnishing a detailed operating manual.

FRANCHISOR

Owns: Trademark, Receives: Fees, Provides: Support, Gives: Training, Gives: Guidance

Provides: Advertising & marketing

FRANCHISEE

Uses: Trademark, Receives: Training, Receives: Guidance, Benefits from: Advertising & Marketing, Pays: Fees

A Quick Summary:

Two Types of Franchising: Product Distribution & Business Format Franchising

Product distribution franchising is seen in industries such as the gas and automotive industry where the franchisee uses the franchisor’s trademark but does not use its business system.

Business format franchising is the most common. In business format franchising franchisees use the franchisor’s complete system as well as the franchisor’s trademark service, or product.

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Related articles

• Guide to the FTC Franchise Rule and Franchisors Required Disclosures (thebusinessstartupkit.com)
• Ok, so you want to become a franchise (thebusinessstartupkit.com)
• Assessing Your Progress (thebusinessstartupkit.com)
• Franchise Operations Manual is the Corporate Guidebook (thebusinessstartupkit.com)
• Franchising, although not the only method of expanding a business, it is undoubtedly the best way! (thebusinessstartupkit.com)