Franchises: Overview, definition, and example
What is a franchise?
A franchise is a business arrangement where a franchisor (the owner of a brand or business model) grants a franchisee (an individual or company) the right to operate a business using the franchisor's name, trademarks, business model, and support systems. In return, the franchisee typically pays an initial franchise fee and ongoing royalties, which are a percentage of the franchise's revenue.
Franchises are common in many industries, including fast food, retail, hospitality, and fitness. The franchisor provides the franchisee with the tools, resources, and guidance needed to run the business, including access to proven marketing strategies, training, and a recognized brand name.
Why are franchises important?
Franchises are important because they offer an opportunity for individuals to own and operate a business with a built-in brand identity and a proven business model. For franchisors, franchising allows for rapid expansion and growth without having to manage every location themselves. It provides a way to scale the business and increase market share by leveraging the investment and expertise of franchisees.
For franchisees, it provides a lower-risk opportunity to start a business with the support of an established brand and proven systems. Franchises often benefit from collective marketing and operational support, which can increase their chances of success.
Understanding franchises through an example
Imagine a local entrepreneur who wants to open a coffee shop but does not want to start from scratch. Instead, they decide to purchase a franchise from a well-known coffee brand, such as Starbucks. By purchasing the franchise, the entrepreneur gains the right to operate a Starbucks store in their area, using the brand's name, store layout, and established supply chains. They also receive training and support from Starbucks, ensuring that they can run the business effectively.
In return, the entrepreneur pays Starbucks an initial franchise fee and ongoing royalties based on the store’s sales. This allows them to leverage the brand's reputation and business model to attract customers, while Starbucks benefits from the franchisee’s investment in opening and managing the store.
In another example, a fitness enthusiast opens a gym by purchasing a franchise from a popular fitness brand like Anytime Fitness. The franchisee receives the benefit of using the established brand, marketing tools, and operational support, which helps to attract members to the gym and ensures consistency in services and quality.
An example of a franchise clause
Here’s how a franchise clause might look in a franchise agreement:
“The Franchisee agrees to operate a franchise location under the [Franchisor’s name] brand, using the franchisor's trademarks, business model, and marketing materials. In exchange, the Franchisee will pay an initial franchise fee of [insert amount] and ongoing royalties of [insert percentage] of monthly gross revenue. The Franchisee agrees to adhere to the operational standards and training requirements set forth by the Franchisor.”
Conclusion
Franchises provide a valuable business opportunity for both franchisors and franchisees. For franchisors, they offer a scalable way to expand without taking on the full responsibility of managing each location. For franchisees, owning a franchise offers a way to start a business with the support of an established brand and proven operational systems. Whether in food, fitness, retail, or other industries, franchising is a powerful business model that benefits both parties involved.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.