What Is a Franchise Business?

When you think of a franchise, your mind might naturally go to your local McDonald’s or Jimmy John’s, but franchising is stretching well beyond the food industry. You might have heard someone mention a company is a franchise, or even that they are a franchise owner, but what does that mean? Find out more about what a franchise business is and how they work. 

What Is the Legal Definition of a Franchise Business? 

A franchise constitutes a legal and commercial relationship between the owner of a trademark, trade name, service mark, or advertising symbol (known as the franchisor) and someone who wants to use that identity in a business (known as the franchisee). In exchange for a fee, the franchisor allows the franchisee to operate under the franchisor’s name and offer the franchisor’s products or services. 

What Are the 3 Types of Franchises? 

While the broad definition of franchising is simply one company allowing another person or business to use their trademarked resources, there are three major categories of franchises.

1. Business Format

This style of franchising is the most popular. The franchisor licenses a business format, operating system, and trademark rights to its franchisees. The franchisor offers a complete system, training, and assistance to their franchisees, including brand style guides that must be followed. Franchisees are responsible for operating and managing the business to the standards that are established by the franchisor. 

Examples of this format include restaurants like McDonald’s and Pizza Hut. It can also include other popular service brands like Sport Clips or Roto-Rooter. 

2. Product Distribution Franchise

In a product distribution franchise, the franchisor manufactures the goods, but it is the franchisee who sells the manufactured product. The most common places you can see this type of franchising are in automobile manufacturers, mobile homes, automobile accessories, and gasoline. 

Some people might confuse this with a supplier-dealer relationship. The difference between a supplier-dealer relationship and a franchise relationship is the extent of the partnership. In a franchise, the franchisee handles the franchisor’s products on an exclusive basis. However, in a supplier-dealer relationship, they may handle several products, even competing ones. 

For example, a franchise relationship with automobiles will exclusively sell one brand of cars. You would never expect to go to a Ford dealership franchise and find a brand-new Mitsubishi on the lot. But if you went to a furniture store that had a supplier-dealer relationship, you would expect to find a Tempur-Pedic right next to a Serta mattress. 

3. Manufacturing Franchise

In a manufacturing franchise, the franchisor creates the idea and concept of the product, and then works out an agreement with a franchisee to produce and manufacture that trademarked and branded item. 

For example, in soft drinks, the parent company produces concentrated syrup for their drinks, but then sells it with the rights to use its brand name and trademarks to a bottling company. The bottling company will then bottle the product and sell it to various suppliers. 

How Does a Franchise Work? 

While the process might be a bit different from company to company, there are some standard practices that apply to the vast majority of franchises. Here are three steps to help you become a franchise owner. 

1. Research

Before you become a franchisee, you need to do your homework. The more you know about the company you’re looking to partner with, the better off you will be. 

This should include finding a franchise concept that fits with your background and budget and looking at the success rate of other franchise owners. Matching the right franchisor to your needs and experience will help you set your franchise up for success.

2. Meet with the Franchisor

With your research done, you can formally apply for a franchise license. Your application might include a background and credit check. 

Often, you’ll receive an invite to a “discovery day” where you can meet with the franchisor to learn more about the franchise agreement. This is also a time for the franchisor to get to know you and see if you’re a good fit for their brand. If all goes well, you will receive a franchise agreement.  

3. Start Your Franchise

With the agreement signed, it’s up to you to start the business. The franchisor will typically provide you with help and guidelines, but you are responsible for running and maintaining your franchise. 

Can You Grow a Business with a Franchise? 

Choosing to become a franchisor is a great way to grow your successful business. Instead of managing and financing each new addition to your business, you’re only responsible for providing training and guidance to your franchisees to ensure they’re following your roadmap for success. If your brand has what it takes to draw a crowd, partnering with other professionals through franchising can be a lucrative prospect.

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