Joel Libava
I’m going to assume you’re here because you want to know the genuine definition of a franchise business. Great!
Read on, so I can tell you!
The Definition Of A Franchise
I’m quite confident that if I asked 5 people for their own definition of a franchise, I’d get 5 different answers. But that’s okay. As they say, you don’t know until you know.
With that in mind, here it is.
A franchise is a business model characterized by the granting of a license by a franchisor to a franchisee (for a fee).
This license gives the franchisee the right to run a business selling a product or providing a service using the franchisor’s proprietary business system and brand for a set period of time (5-20 years).
In addition, the franchisee must follow the procedures, guidelines and rules regarding the operation of the business.
Franchise Business Definition Continued: Initial And Ongoing Fees
Of course none of this is free. Here are the fees franchisees must pay.
The first fee is the Franchise Fee.
From my comprehensive article about the Franchise Fee:
The Franchise Fee an upfront fee charged by franchisors that grants you a license to operate their business for a defined period of time. And once you pay it, you officially become a franchisee. Read the article
The next set of fees are what’s known as ongoing fees. These include:
- Technology fee
Most franchisees are required to pay for maintenance and support of all the technology provided by the franchisor.
This usually includes the local franchisee website, the email marketing system, phone system and the point of sale (POS) system.
- Marketing fee
Most franchisors require their franchisees to pay into a national marketing fund.
The amount paid by franchisees is normally a percentage of their monthly revenue. However, I have seen some franchisor charge a flat fee instead.
- Call Center fees
Although not as common, more and more franchise companies are setting up call centers.
The thinking behind them is it frees up franchisees to run and grow their businesses, instead of having to drop what they’re doing to answer the phone.
Cost-wise, these fees will be anywhere from a few hundred dollars a month, to several hundred dollars a month if there’s a call center involved. Check with the franchisor.
Then there are the royalties.
Royalty Fees
All franchisees pay royalties.
Franchise royalties are the ongoing (monthly) fees franchisees pay to their franchisor for the use of their business model, brand, products, services and continued support.
In most cases, franchisees are charged a percentage of their monthly revenue.
These range from 4%-15% or more, depending on the type of franchise it is.
For instance, a full-service restaurant franchise like Eggs Up Grill charges its franchisees a royalty of 5% of gross sales.
So if a franchisee in their system brings in $30,000 of revenue this month, she’d pay Eggs Up Grill $1500.
Is Paying Royalties Worth It?
It depends who you ask.
In a perfect world, the franchisor and franchisee benefit from these payments. Why?
Because the franchisee gets to use the franchisor’s brand, buying power, technology and marketing system, while the franchisor benefits from the continued increased brand awareness, and with it, the growth of the franchise system.
One More Franchise Definition In Business
Here’s my non-legal definition of a franchise:
“An arrangement in which the entrepreneur (the franchisor) who has invented a business that sells goods or services, it’s system and its model, who is looking to replicate it, partners with and gives people who would like an opportunity to own their own business, the right to use proprietary, detailed techniques in running it, while building equity for themselves and their families. The franchisor’s own money is invested up front, while company growth is leveraged by using other people’s (the franchisees) money.”
Wait. There’s actually one more way a businesses is defined as a franchise business.
How The Federal Trade Commission (FTC) Defines A Franchise Business
This is important. How important?
Ask any franchise lawyer who’s had to tell an entrepreneur he’s actually running a franchise business instead of something else like a licensing opportunity or a dealership. It’s a big legal headache. Anyway…
The FTC Rule defines a franchise as “Any continuing commercial relationship or arrangement in which the terms of the offer or contract specify, or the franchisor promises or represents, orally or in writing.”
And…
1. The franchisee will have the right to operate a business that is identified or associated with the franchisor’s trademark or to offer, sell or distribute goods, services or commodities that are identified or associated with the franchisor’s trademarks
2. The franchisor will exert or has the authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation;
3. As a condition of obtaining or commencing operations of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate.
Read more at Lexology.
FYI: this business is not a franchise business
Did That Definition Help?
I hope I helped you understand what defines a franchise business.
And now that you know, what are your feelings about potentially owning a franchise?
Will you be able to live with the rules?
Are you okay paying royalties?
Is franchising the path you’d like to take to own a business?
The way to finally be your own boss?
If so, here’s how to go about doing it.
