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Looking Under The Hood Of A Franchise System
October 28, 2022
Franchise systems are a relatively niche business type yet are among the most successful business operations in the US, where an estimated eight million people are employed across 750,000 businesses. So for current or potential business owners looking for a franchise opportunity to invest in, it’s understandable that they’d want to do their due diligence by looking under the hood of a franchise system and seeing what it’s all about. So here we’ll answer the fundamental question ‘what is a franchise system?’ and give some insight into how the whole operation works.
What is a Franchise System: The Basics
A franchise system is a licensing agreement between one company and another. Most often, the agreement sees the franchisee pay a fee to use the franchisor’s branding and trademarks, as well as get access to their business operations procedures. This then becomes a much larger business ecosystem, where many individual businesses will operate under the same name while not technically being part of the same group. Any company can technically become a franchise if it has something that is licensable, so it can’t just be copied for free and must also be replicable somewhere else.
Naturally, there will be many points of intersection between these franchises, but, importantly, they are not liable for the losses of another, nor do they share in any of their profits. This can lead to situations where some franchise operations continue to exist even after the initial franchising company has disappeared, such as with Blockbuster in Alaska. There are also other types of licensing agreements that may see one company uses the trademarks of another, but these are not as closely bound as franchise agreements.
What is a franchise system: Where it started
The origins of franchising can be dated back to the Middle Ages in Europe, and the first franchise operation in North America was actually set up by Benjamin Franklin in Philadelphia in 1731. Of course, not all franchising was the same back then, but many of the modern elements of how a franchise system works can be identified in Franklin’s printing houses franchise, such as a proprietary supply agreement, a fixed-term contract and the multiple similar arrangements across North America and the Caribbean.
Franchising then flourished during the US’ Golden Era of Industrialization in the 19th century, with franchises, such as Singer sewing machine shops being able to ship material and business concepts by rail across the country. Franchising became particularly popular in the US as large distances made it difficult to maintain direct ownership. Yet, cultural similarity meant, for example, that a business that did well in Charlotte could also do quite well in San Diego.
What is a franchise system: How it works
Franchising has changed much over the years though the core concept of working under the license of another business has remained. Today franchising is relatively regulated by the Federal Trade Commission (FTC), which sets out rules about how a franchisor must communicate with potential franchisees. This is done through the federally mandated franchise disclosure document FDD, which has a number of specific points about a franchisor’s financial records, fees and contract requirements.
The exact terms of a franchise contract will vary depending on the franchisor, but there are some certainties for how the system will work. These include:
Franchise Fees/Royalties:
One definite is that a fee will have to be paid, not least because the FTC requires a minimum of $500 to be paid for the relationship to be considered a franchise. The amount of initial fees or ongoing royalty payments will be decided in the franchise agreement signed at the start of the partnership.
Trademarks:
It can be hard to quantify the power of a recognized brand name, but franchisees are betting it’s worth at least the royalty fees they’re paying. This license to use trademarks such as product names, slogans or intellectual property, as well as to trade under the franchisor’s name and use their branding, is the franchisor’s end of the exchange in a franchise relationship.
Business Systems:
One of the main reasons people open a franchise instead of a whole new business is the advantage of using the franchisor’s operations systems, which have been honed over years and multiple different instances. These will help the business to operate more efficiently and save the owner time when dealing with work situations.
Conclusion
Franchises are a popular and successful type of business, especially in the US, where the history of franchising goes back to Benjamin Franklin. A franchise is a business relationship whereby the franchisee gets to use the brand name, trademarks and operations systems of the franchisor in exchange for a franchise fee and ongoing royalty payments.
If you’re still wondering what is a franchise system all about and how it can help you run a successful business, then why not talk to us at Screenmobile? We’ve been running our system in the home improvement niche for four decades and have an incredible 99.5% renewal rate. To find out more, you can read about becoming a franchisee here or talk to our team directly.
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