Quick Answer: A franchise is more than another business using your name. Generally, a franchise relationship involves allowing someone to operate a business using your name, where you provide significant assistance and have significant control over how someone (a franchisee) operates your business and is characterized by you receiving ongoing payments as compensation. By franchising your business, you are creating an ongoing relationship in which a someone owns and operates their own business while following the processes you have developed.

If you have built a successful business and are thinking about expanding, you may have wondered what actually turns a business like yours into a franchise.

Is it having multiple locations? Is it allowing someone else to use your business name? Is it collecting fees?

Actually, what makes a business a franchise is the relationship you create with the person who will own and operate the franchised business. As the franchisor, you provide the magic formula. The franchisee invests in and owns their individual business and agrees to operate it according to the standards you have developed.

That relationship is what separates franchising from you simply opening another company-owned location.

What Separates a Franchise From an Independently Owned Business?

Think about everything you had to do when you originally started your business.

You probably had to create a name and logo, find a location and negotiate a lease, determine how you were going to sell your products or provide services, figure out how to price everything, develop processes to work efficiently, figure out how to find customers, establish your reputation and more than likely you fell down a few times learning countless lessons along the way.

When you franchise your business, your franchisee isn’t starting from ground zero.

You have already developed the business model and mastered how it works. Your role is to teach, mentor and coach your franchisee as they follow your blueprint (take a look at “What is My Role as a Franchisor”). Your franchisee is being given the opportunity to operate a business leveraging your knowledge and using what you have developed to run a business.

Depending upon your particular business, that typically includes:

Your name, trademarks and branding
Build out specifications (if your business requires a space)
Training on how to operate the business
Your operating procedures and standards
Marketing and advertising programs
Products, suppliers, equipment or technology
Ongoing guidance and support

A franchisee is not your employee. They own and operate their own business, invest their own monies, resources and are responsible for all day-to-day operations.

However, franchisees do not have the same freedoms as someone starting an entirely independent business. In a franchise situation, the franchisee agrees to follow your rules, processes and standards when operating your business in their market.

This combination of independent business ownership while the franchisee operates your business your way is one of the things that makes a business a franchise.

Franchising Your Business Creates a Regulated Relationship

You can’t simply call an arrangement a franchise until you comply with franchise laws (take a look at “What Are the Requirements to Franchise a Business”).

At the federal level, there are few elements in the relationship that are used in determining whether a business relationship is a franchise: the use of a trademark or commercial symbol; if you have significant control or provide significant assistance in the operation of the business (this is called operational assistance); if you are providing any type of marketing assistance (and this includes listing their location your website); and an ongoing payment is required (this is called royaltes).

In other words, what you call the relationship isn’t necessarily what determines whether you have legitimately created a franchise.

In order to franchise anywhere in the United States, there are a few steps to franchise you will have to complete which includes documents you must provide to someone who is interested in becoming a franchisee. These documents are intended to give a prospective franchisee important information about the relationship they are about to enter before moving forward. This is called a Franchise Disclosure Document (FDD) and is typically a packet that has both federal and state mandated language in there in an effort to keep you honest and protect the franchisee.

The FDD contains required information about you, your franchise system and the franchise relationship being offered (take a look at the “The Elements of a Franchise Disclosure Document”). Its purpose is to provide prospective franchisees with important information they can review before deciding whether to move forward with your franchise program.

Why Would You Want to Franchise Your Business?

If you want to expand your business into other markets, one of the biggest questions is who is going to provide the talent, time and money needed to make that happen?

You could open additional company-owned locations. But that generally means you provide the capital, find locations, hire employees and take responsibility for operating those additional locations.

Franchising gives you another way to grow.

Instead of owning every new location yourself, your franchisees invest their own talent, time and money to operate your business in their market. You provide the name, training, processes you have developed (your magic formula), guidance and ongoing support while they take responsibility for everything else.

That’s one of the biggest reasons you may consider franchising: you can expand into other markets by tapping into other people’s talent, time and resources rather than trying to do everything yourself.

But your responsibilities don’t disappear.

Your role begins to change from simply running your own business to helping franchisees duplicate what you have already built. That means training, mentoring, answering questions, helping franchisees work through challenges and continuing to improve your franchise system.

Why Would Someone Want to Buy Your Franchise?

For franchising to work, there obviously has to be something in it for the person on the other side of the equation.

Someone who wants to own a business has choices. They can come up with their own concept and start a business completely from scratch, buy an existing independent business from someone who wants out or purchase a franchise.

Remember when someone purchases your franchise, they aren’t starting from zero. You have already done much of the trial and error involved in figuring out how your business works.

In exchange for the use of your name and all your help, franchisees generally pay ongoing fees and royalties, agrees to follow your processes and standards in order to provide customers with the same experience in their area.

That doesn’t mean owning a franchise is automatically better than starting an independent business. It means the franchisee is choosing to operate within a business system that someone else has already developed rather than creating everything on their own from scratch.

Does This Mean Your Business Can Become a Franchise?

Now that you understand what makes a business a franchise, the next logical question may be:

Can your business become one?

That’s a different question.

Just because you can franchise does not mean you should franchise or your business is ready to franchise. Some of the things you should think about include:

Do you have a proven product or service customers consistently want?
Is your business profitable?
Can you teach your methods, processes and techniques to someone else?
Will your business work in other geographic areas?
Do you have something that differentiates your business from other businesses doing the same thing?

There are other considerations, including whether you personally are ready to take on the responsibilities that come with becoming a franchisor.

If you want to dig deeper into whether your particular business may be ready, take a look at “Is My Business Franchisable?”

How Do You Turn Your Business Into a Franchise?

If you determine that franchising fits the way you want to grow, then you need to develop a franchise program around the business you have already built.

That involves much more than preparing franchise documents. Decisions need to be made about your franchise structure, fees, royalties, territories, training, protections for your trade secrets, responsibilities and obligations you and your franchisees will have to each other. And those decisions should reflect your business, rather than trying to make your business fit into someone else’s predetermined franchise program (take a look at “Franchise Development Isn’t a Template Process”).

The Franchise Maker is a franchise development company helping business owners franchise their businesses since 2005. Our focus is franchise development, we specialize in one thing which is making franchises (hence our name). We do not market or sell franchises, take any commissions from franchise sales or keep our hands in your pocket afterwards. If you’re considering franchising your business, call us directly at 1-877-615-5177 to discuss your business.

GET STARTED!

What Makes a Business a Franchise?