Franchising a Business? No Need for Confusion.
Begin at the Beginning
What is franchising a business? This is a commonly asked question for good reason. Those who are new to the franchise industry don’t know terminology and why would they? Every business, sport or activity has its own jargon and franchising is no different. This a short post because the answer short. So here goes.
Many think of it as buying a franchise
Those who are new to the industry often associate franchising a business with the act of buying a franchise. And it makes some sense on the level of starting a franchise, acquiring a franchise, buying a new franchise unit, or purchasing an existing franchise location.
The Term has to do with Establishing a Franchise Brand
So, what is franchising a business? Technically, or within franchise circles, it means creating a franchise brand from a given business model or concept. The entity establishing a new franchise brand is a franchisor. Those who purchase franchised units of that brand are franchisees. Put another way, franchising a business is simply a method for growing a particular business or brand. Other options might be partnerships, private or public growth as a corporate owned chain, business opportunities, or distributorships, among other choices. To franchise a business is to create a legally formatted structure, a franchise, under the guidelines of the FTC, Federal Trade Commission. The franchisor owns the franchise brand or name, and sells rights to using that brand name to entrepreneurs who then become franchisees.
In addition to the FTC ‘rule’ that defines a franchise, several individual states, known as franchise registration states, publish their own franchise laws. If a new franchise brand is developed within a registration state, the franchisor will meet those additional standards. To confuse things a bit more, if a franchisor is based in a non-registration state, but wants to sell a franchise unit in a registration state, it will have to meet that state’s requirements before making that sale.
So, what is franchising a business? It’s simply the creation of a legal format designed to multiply itself through the sale of franchises. Clear as mud? OK, the franchior, who owns the franchise brand, sells units to buyers who are franchisees. If you’d like more insight into the world of franchise theory and practice, we’ve publish a nice set of articles for franchisors, franchisees and those thinking about joining the industry in some capacity.