What is Franchising

Franchising is a continuing business relationship between a franchisor, who grants certain licensing privileges and assistance to franchisees, and a franchisee who pays for the right to conduct business under the franchisor’s trademarks and system. The franchisor, as the owner of the trademarks, products, services, and/or methods of distribution, provides the franchisee the initial assistance necessary to begin the business. The franchisor will also provide ongoing assistance, ongoing training, pre-opening assistance, and any assistance required thereafter as specified in the franchisor’s franchise disclosure document. The franchisor offers the franchisee, inter alia, name recognition, products that have been tested and are ready for market, uniform building design and décor, and techniques for running and promoting a successful business. In exchange, the franchisee will pay the franchisor a one-time initial franchise fee plus, on an ongoing basis, a percentage of sales revenue, royalties, or gains. The franchisor may over time change its franchise system by modifying its operations manual, and franchisees must implement any such changes in their operations.

As described above, therefore, franchising is the association between two groups with a common goal to succeed. There are several franchises types to choose from. The most common franchises are single unit franchises and multi-unit franchises:

The single unit franchise is the most commonly used format. This format grants the franchisee the rights to open and operate one business under the franchisor’s established business name at a specified location. The franchisee owns that particular franchise location and the franchisor will receive royalty fees from that location.

Under the multi-unit format, the franchisor grants the franchisee the right to open and operate more than one franchise location. There are generally two types of multi-franchise agreements: (1) area development agreements; and (2) area representative agreements. Under the area development agreement, the franchisor grants franchisees the right to open a certain number of franchise units in a specified territory over a predetermined amount of time. Under the area representative agreement, on the other hand, franchisees have the right to not only open and operate franchise units themselves within a specified territory over a predetermined time period, but also have the right to sell franchises to third parties within that territory. Accordingly, an area representative is basically a sub-franchisor and takes over many responsibilities and benefits that the franchisor would otherwise have with respect to the franchise units within the area representative’s territory.