Franchising defined: The ultimate 'Franchising for Dummies' guide

• Franchisee:  This is you. A Franchisee is a business owner who has purchased the right to use another business's brand, policies, and procedures to earn profit. In exchange they have to pay that other business a fee, and promise to follow the polices, procedures, and brand standards properly. 
• Franchisor: This is the business that you purchase the brand, policies, and procedures from. In exchange for teaching you their 'systems', and for maintaining and improving those systems, you pay them a fee. 
• Licensing Fees: Often referred to as 'Royalties', these are the fees that a Franchisee must pay to a Franchisor on an ongoing basis in exchange for using the Franchisor's systems. 

So, putting this all together, Franchising is thus a mechanism, or a process through which one person creates a system of doing something, say, making pizzas, and then sells that system to another person, who uses the system to sell all of the pizza they can and in exchange gives a fee back to the first person for doing so.

This model allows for a unique business structure in which a Franchisee learns the tools of the trade from a Franchisor, and can take those tools and expand their own business without having to make sure that they invest in updating said tools. Instead, they just have to pay the Franchisor a small fee each year and the Franchisor makes sure that the tools being used are still the best ones in the game. 

A brief history of Franchising

Now that you understand the basics of the Franchising model, you should also know a bit about it's history to really understand how it developed into the winning model it is today. 

The first known iteration of Franchising was started by what is probably a familiar name to you, the one-and-only Benjamin Franklin...yes, that Ben Franklin. In addition to co-writing the Declaration of Independence and  inventing bifocals, in 1731 Ben Franklin entered into a 'co-partnership' with Thomas Whitmarsh to open a printing business in Charlestown, South Carolina. This contract had a term of 6 years, in which Whitmarsh was responsible for managing all of 'care, management, and direction' of the printing business 'at his expense', and in turn Franklin would supply all materials needed for said printing at a fee. Franklin made similar co-partnership agreements with other individuals in other colonies across America.

In 1891, another famous franchising founder named Martha Matilda Harper created what was a much more modernized version of Franklin's early idea. She created what was known as 'Harper Method Shops/Salons', and was the first Franchisor to develop what came to be the modern support systems that are now a hallmark of the model. Providing initial and continuing training, branding her hair-care and other products that were used in the shops, providing advertising and on-site visits to her partner's stores, she grew the model to over 500 salons and worked until her retirement in 1950. 

Others claim that John 'Albert' Singer, of I.M Singer & Company (i.e. the sewing machines your grandparents probably have in a cupboard somewhere) founded the first modern franchise model in 1851, but whether or not Singer was engaged in true franchising remains up for debate. 

Franchising continued to exist in America, with famous names such as Coca-Cola franchising their formula and brand to companies across the United States at the turn of the century, and Harveys and A&W starting to pave the way for what a modern franchised restaurant could look like. Around the same time General Motors and Ford Motorcars began exploring the Franchise model as a means to distributing their cars throughout the country.

The biggest boom in Franchising, however, came after World War II. With the right mix of post-war drive in a victorious America and the passing of new trademark law that allowed owners of intellectual property to share it with third parties in a safe way, confidence in the model was built at new levels and with it came a host of of today's most well-known brands, including:

• Holiday Inn
• Dairy Queen
• Orange Julius
• 7-Eleven
• Roto-Rooter
• McDonald's

Since this time Franchises have continued to pop up in all different types of industries, and Benjamin Franklin's fundamental split of duties and responsibilities has continued to be the backbone of the model, complimented in modern times with strong corporate supports as well as strict regulations and disclosures (first introduced in 1968) to ensure that brands delivered all relevant information to individuals who could safely identify the good franchising opportunities from the poor ones. 

Franchise Disclosure and the Franchise Agreement

In 1968 the State of California the United States made it mandatory for Franchisors to disclose information to Prospective Franchisees. This practice continues in virtually every country around the world today, and offers a strict process through which Franchisors and Franchisees can be mutually assured that the specific model is in both parties' best interests. Many attribute this pre-sale disclosure as one of the biggest reasons why Franchising has emerged as such as successful model in the modern world. 

Now, let's not let all of this history and legal talk confuse us. We'll simplify everything back down for you by again defining some of the terms that we've introduced:

• Franchise Disclosure: This is a legal process that establishes how a Franchisor (i.e. the person with the system) provides all information deemed essential to making an assessment of the potential risks and benefits of a Franchising opportunity to a Prospective FrancFhisee (i.e. the person interested in purchasing the system). This process varies slightly from country-to-country and region-to-region, however in all cases Disclosure is typically carried out through the sharing of a Franchise Disclosure Document.
• Franchise Disclosure Document (a.k.a. the FDD): This is a document prepared by a Franchisor, in accordance with all relevant Franchise laws, in 'plain English' (i.e. not legal jargon) that provides the Prospective Franchisee with specific information about the business, the business offering, all terms and conditions of the relationship, and the rights and obligations of both sides. It is essentially the de-facto contract between both parties, and typically covers the topics below:
  • A summary of the Franchisor's business and services
  • Initial and other ongoing fees
  • Estimated initial investment and any other required investment throughout the agreement's term
  • Rules around litigation, bankruptcy, conflict resolution, etc.
  • Systems, supports, and services offered by the Franchisor
  • Obligations of the Franchisee
  • Trademarks, patents, copyrights, other proprietary information
  • Financial Performance Representations, Financial Statements, Public Figures 
  • And more
  While originally FDDs were put in place to protect the Franchisee, many Franchisors have come to appreciate the use of these documents. An FDD provides a benchmark or standard for which all Franchise models can be clearly and easily compared. Strong Franchise Models should be excited to share their FDD with you, in accordance with pertinent law of course, as it let's them 'put their money where their mouth is', so to speak. 
• Franchise Agreement: Typically, Franchisors will provide the necessary Franchise Disclosure documents at the same time as the contracts that allow a Franchisee to formally enter into a working relationship with the Franchisor. These collective contracts and disclosure documents are typically referred to as a Franchise Agreement. A Franchisor will typically be obligated to provide a Franchise Fee upon signing of the Franchise Agreement, after the legally-mandated period for disclosure has been completed (often 14 days from receiving of documents). 
  
  The contents of a Franchise Agreement are typically explicitly confidential, and should not be shared with people other than those explicitly identified as being the receivers of the information. However, most Franchisors will also recommend that Prospective Franchisees have these documents reviewed by a lawyer and accountant during Disclosure, who can provide further clarification and conclusions to the Prospect that they may miss themselves. A good Franchisor should also be available for questions and clarifications that might come up when you are reviewing these. 

Summary

The Franchising model is a unique business structure that offers a split in responsibilities between a Franchisee and Franchisor that, when mutually employed properly, can create a truly magical business opportunity for all parties. 

Franchising has a long history that has helped shaped modern society through some of our most recognizable goods and service offerings, and some may say even helped to fund America's Founding Fathers!

The relationship between Franchisee and Franchisor should always be clearly laid out in a transparent and digestible document known as the Franchise Disclosure Document, and a larger Franchise Agreement that should clearly stipulate the duties and obligations on both sides of the relationship. With a considerate review of this agreement, and a good-faith commitment from Franchisee and Franchisor, Franchising can provide a unique opportunity for business owners to achieve their goals and grow their business sustainably over the long-term.