What is Franchising?
Franchising is an industry where a franchisor licenses a complete business model to a franchisee. Franchising is a growth model for small businesses that allow the owners of the business model to expand while using outside capital and retaining control over the business model.
A franchise relationship is defined by the Federal Trade Commission (FTC) as having three main properties. If these three properties are present then the FTC will rule the business relationship as a franchise regardless of the name of the contract the parties signed. There is a common mistake called “the accidental franchise” where these three elements are created within a licensing or distribution agreement. An accidental franchise can create large financial and legal issues for the accidental franchisor if the accidental franchisee takes the accidental franchisor to court. If you’re building a business model you’d like to replicate and it includes the three elements below it is likely a franchise and should be documented as such. Franchise opportunities have their own set of FTC rules to follow and some very solid case law to protect all of the parties involved.
- Trade Name – Every franchise agreement gives the franchisee the right to use the franchisor’s name brand. Typically this name brand should be trademarked but a trademark is not necessary to satisfy this part of the franchise definition. Any one offering a business opportunity where they grant a trade name to the business opportunity buyer meets this part of the franchise definition – regardless of how well known the trade name is or isn’t.
- Business Systems – A key element of the franchise relationship is the presence of a business system. The business system is typically outlined in an operations manual and contains trade secrets for systems, processes, procedures, recipes, techniques, and marketing methods.
- Fees of $500 – Upfront and/or ongoing fees of $500 or more in the first six months is the final part of the franchise definition. This figure should explain why so many MLM opportunities have entry costs just below $500.
Franchising your business means entering an entirely new line of business. Your customer is no longer the public; it is now your franchisees. If you want the three elements described above franchising is likely the only way to legally replicate your business on a large scale.
About the Author:
Kelcey Lehrich is a franchise consultant and business intermediary. Kelcey’s work in franchising includes franchisor development, sell-side franchise sales, and buy-side franchise consulting. Kelcey is part of FranchiseInc!, a national franchise consulting firm. Kelcey also work as a business intermediary with Confidential Business Sale, a regional business brokerage firm with offices in Cleveland, Pittsburgh, and Detroit. Lastly, Kelcey is also an Area Director for AmSpirit Business Connections, a national business networking organization that assists sales representatives, entrepreneurs, and business owners succeed by creating a forum where they can exchange qualified referrals with other professionals.