What is a Franchise?

What is a Franchise?

According to the International Franchise Association (IFA), a franchise is a method for expanding a business and distributing goods and services through a licensing relationship. What some may not realize is that the concept of franchising dates back to the Middle Ages.

Back then, some of the local governments granted high church officials and other select individuals a license to maintain order and determine tax values. These individuals were allowed to hold markets and perform business-related activities, and in return, they paid a royalty.

At the turn of the 20th century, the concept of franchising was revolutionized by Singer sewing machines, automobiles, gas stations, and of course, eventually restaurants like McDonald’s in the ‘60s.

Understanding the Franchise Business Model

In today’s business environment, two types of franchise business models are used. The business format model is the one that the average person recognizes as a franchise. With this type of franchise, the franchisor will provide franchisees with a complete system for operating the business, including a trade name and products or services.

In exchange, the franchisee will pay an initial one-time franchise fee that can vary greatly in amount depending on the type of business. They also usually pay an ongoing royalty fee on a monthly basis that can be a fixed rate or as a percentage of total sales. Other fees like marketing and required purchases may also be involved.

The other type of franchise business model revolves around product distribution where sales generally exceed those of the business format. In this model, a franchisor manufactures or supplies products to the franchisees. While not true of all situations, most of the products do require some form of pre- and post-sale services, with the automobile industry being a prime example.

What Types of Businesses Can be a Franchise?

Franchise-related businesses cover a lot of industries, and the concept can be applied in many different ways given the formats described above. In fact, the IFA states that over 120 diverse industries utilize franchising as a marketing avenue.

Some of these industries include restaurants, automobiles, children’s services, janitorial services, education, health and wellness, senior care, and travel and tourism to name a few. Even though some types of businesses are well-known for having franchise models, modern-day entrepreneurs are starting to break some of these molds to come up with new concepts and ideas.

The Factors that Make a Franchise Successful

Due to the well-documented history of franchises, specific factors have been proven to make this type of business model a success. The key factor to focus on for success is the type of system that the franchisor provides to franchisees. The better the system, the more tools and support the franchisees will have to be able to live up to the franchisor’s expectations.

Having a solid system also benefits the franchisor as it works towards guaranteeing their continued success. It can also serve as a blueprint if the franchisor wants to expand and create a multi-franchise business.

If you’re wondering if a franchise model is right for your business, click here to contact a member of Big Sky Franchise Team for a free consultation.

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