Franchising Defined #1

What’s a franchise?

I’ll start with a somewhat clinical definition in this post, and then add some personal definitions from others in the industry in follow-up posts.

Michael Seid and Wendy’s founder Dave Thomas provide the following definition in Chapter 1 of Franchising For Dummies:

A franchise occurs when a business (the franchisor) licenses its trade name (the brand, such as Wendy’s or Midas) and its operating methods (its system of doing business) to a person or group (the franchisee) who agrees to operate according to the terms of a contract (the franchise agreement).  The franchisor provides the franchisee with support and, in some cases, exercises some control over the way the franchisee operates under the brand.

In exchange, the franchisee usually pays the franchisor an initial fee (called a franchise fee) and a continuing fee (known as a royalty) for the use of the trade name and operating methods.

For example, if you want to open a McDonald’s restaurant, you would need to make a total initial investment of $506,000 – $1.63M for construction, equipment, inventory and initial staffing.  Included in this figure is a franchise fee of $45,000 that goes to the company.  Once you’re open, you’d pay 12% of your gross sales as a royalty and 4% into the advertising fund.