The SBA has defined a franchise as:
A legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchiser or that meet the franchiser’s quality standards.
When creating a franchise business, the most widely used model is called a “business format” franchise. To create a franchise under this model involves the “Franchisor” granting a “Franchisee” the right to market goods and/or services in a specified territory using the Franchisor’s trade name and system of operation in exchange for payment of a franchise fee, and typically, an ongoing royalty fee. The Franchisor dictates processes and procedures Franchisees must follow to develop the franchise business and during the ongoing operation of the business. To assist Franchisees in starting a franchise, Franchisors provide various support, which may include site selection assistance, initial training, approved sources of supply, and advertising and marketing programs.
Many established national and international companies have chosen to create a franchise due to the fact that franchising provides the opportunity for maximum market penetration while minimizing the company’s financial risk and contingent liabilities. At the same time, a franchise system permits the Franchisor to maintain maximum control over the individual franchise locations thereby protecting the brand and system of the Franchisor. Franchisees benefit by investing in a proven system of operation that eliminates many of the pitfalls associated with starting a business from scratch.
When considering whether to create a franchise, it is important to recognize that franchising offers tremendous advantages over the high capital costs associated with internal/corporate expansion in addition to the infrastructure and employee issues that accompany this expansion method. The problems associated with managing, recruiting, training and retaining a qualified work force as well as the responsibilities for the day-to-day operations of individual locations are dramatically reduced under a franchise system. Additional benefits of creating a franchise include cost savings that can be achieved by the Franchisor and Franchisees from volume purchases of products and increased advertising and marketing spends leading to increased brand recognition.
