What Franchise Ownership Is. And What It Isn’t

Feb 22, 2022 | Articles, Blog, Blogs, General

When entering the business world, it can be daunting to discern the confines, gravity, and scope of franchising. What exactly does franchising entail? How do you know if franchising is right for you? It’s important to first understand exactly what franchising entails, and then contrast franchising with other types of legal agreements to understand if franchising is the right avenue for you.

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According to Franchise.org, a franchise “is a method of distributing products or services involving a franchisor, who establishes the brand’s trademark… and business system, and a franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system.” Simply put, a franchisor licenses out its company to entities who create individual branches of that company. In a franchisor-franchisee relationship, the franchisor maintains total control over the company’s branding. For instance, McDonald’s, the most popular franchise in America, maintains the same branding, menu, and layout throughout all of its stores. Although each McDonald’s is owned by a different individual that acts as the franchisee, the core of the company remains the same throughout each location.

Franchising is a contractual relationship, meaning that it is a licensing agreement under the Federal Trade Commission that stipulates that the franchisor grants a franchisee permission to use the company’s trademarks, and as a result, the franchisee pays a fee to the franchisor. The franchisee will operate its individual branch of the company, and the franchisor will monitor and oversee the franchisee’s activities.

Franchising is beneficial because franchisees receive a pre-made business plan: since there are already many successful existing locations of the business, new franchisees have clear examples to follow. Because of this proven success, it is also easier to receive a loan for a franchise than it is to receive a loan for a start-up or small business. However, franchising does require that its owners adhere to certain guidelines dictated by the franchisor, meaning there’s less room for franchisees to develop creative decisions or solutions of their own.

It is also important to recognize that franchising is not a mere licensing agreement. A licensing agreement occurs when one party legally grants another party to use its trademark and legal rights. One of the most common licensing agreement examples in America is Disney: the Walt Disney Corporation grants other entities, such as clothing companies or toy companies, permission to use Disney characters in their products. Licensing deviates from franchising in one key area, as licensees retain creative freedom when it comes to production, design, marketing, and distribution.

Franchising also differs from company-owned expansion of a business: while both involve growing a company and instituting new branches within the company, franchising outsources ownership to third parties, while company-owned expansion retains ownership within company employees. Franchising typically includes some corporate-owned locations in addition to the third-party franchisees.

When trying to determine if franchising is right for you, it’s important to reflect on what you value as a business owner. If you’re seeking creativity and freedom, franchising might not be the best option for you. However, if you’re looking for a business route that will provide structure, partnership, and stability, franchising is an excellent option to pursue.

If you’d like to explore whether franchising is a fit for your business ownership dreams, perhaps it’s time to begin an entrepreneurial journey of your own. FranNet can help you get started today by setting up a no-cost, no-obligation appointment with a qualified FranNet representative who both lives and works in your area. Together, we can find a franchise ownership opportunity that matches up perfectly with your lifestyle and income-oriented goals.