What is franchising? Everything you need to know from the definition to the real-world applications

Most people think they know what franchising is. And — for the most part — they get the general gist: you invest your money and get to operate your new business under a recognizable trade name.

But franchising is more nuanced than that. There are three main types of franchise opportunity — and this article will explain how they differ (and how they’re similar) while giving you some ideas about how you might enter into your first franchise business.

Franchising is a colossal business opportunity

Before we get started, let’s consider some facts about franchising in Canada.

• There are around 1250 Canadian companies offering franchises
• There are 76,000 franchised outlets throughout Canada
• Franchising is particularly popular with Millennials in Canada, helping them take control of their careers
• 1.8 million Canadians work for franchises
• Franchising contributes $96bn to Canada’s economy (almost 5% of GDP)
• Franchises paying $61bn in wages each year

What IS franchising?

Franchising is essentially a business relationship between two organizations where one of those parties licenses their products, services, or intellectual property to be used by a new partner.

The franchisee invests in a tried-and-tested business idea, while the franchisor gets to expand the reach and distribution of their original product or service.

The franchisee inherits the parent company's business system, branding, trademarks, and all identifying marks — provided with specific guidelines.

So, when you invest in a franchise, you're bound into a partnership agreement with the parent company for a predetermined period.

However:

Ensure you fully understand your agreement terms because each contract will be different.

What was the first franchise?

Franchising, in the form we know today, originated in the 1950s from Singer, the sewing machine company.

Isaac Singer invented the sewing machine and set about distributing his invention. But he discovered two principal problems that prevented the expansion of his fledgling business:

• Customers needed training to use the machine
• Singer lacked the capital for mass manufacture

So, Singer paired up with some sharp business minds who suggested that he sell the rights to vend his innovative machines AND train customers to use them. And he sold those rights to local business people around the USA (and eventually the world).

And, of course, the idea worked.

Singer's enterprise quickly expanded, and the license royalties helped offset the manufacturing costs. Each franchise was self-financed, which meant that Singer Manufacturing Company tapped into the local knowledge and entrepreneurism of the franchisees. And this helped Isaac Singer expand his business in ways he would never have achieved had he gone it alone.

When franchising became big (Mac)!

The real tipping point for franchising didn’t come until nearly one hundred years later, with a now massively successful burger chain — of course, it’s McDonald’s.

Ray Kroc happened upon a successful hamburger stand in southern California. He recognized that the business could scale up through an assembly-line concept, influenced by Henry Ford's factory-line manufacturing innovations. He believed that McDonald's customers should know what to expect wherever in the world the restaurant might be.

Large-scale franchising was proven successful, and many entrepreneurs and business owners recognized how the concept could extend to their own organizations.

Franchising today

The success of the McDonald's franchise model proved the concept, and elements of that approach have since been adapted in a vast range of industrial disciplines.

For example, Coca-Cola used franchising to expand its popular product's manufacturing, storage, and distribution to local businesses that had bought bottling rights. And, of course, that function now occurs in every corner of the planet.

Franchising expanded into car manufacturers and oil companies and today supports hundreds of thousands of businesses across the globe.

Franchising: The Myth of Guaranteed Success

No business approach can guarantee success, regardless of their promises to investors. And franchising is no exception.

However:

Franchising offers franchisees:

• A well-recognized brand
• A proven product or service
• An established (and recognized) customer base
• A functional business operation/operating system with manufacturing and distribution infrastructure

Franchising + hard work = success

So, although there’s no 100% guarantee, a hard-working franchisee is likely to make a success of their franchise opportunity. Franchises are businesses that have already overcome the problems all new ventures face, so if the idea is right and the franchisee is prepared to put in the work, success is likely.

We recommend following due diligence in making your franchise decision. Seek professional advice, and ask questions until you’re confident that your proposed franchise is right for you.

Remember, your investment is at stake — make sure you’re fully aware of the terms of the agreement.

Franchising — the small print

The International Franchise Association (IFA) defines franchising in explicit detail. They describe the concept as:

• A contractual relationship between a franchisor and a franchisee
• The franchisor maintains a continued interest in the franchisee, sharing know-how and training

This allows the franchisee to:

• Operate under a common trade name, which remains the intellectual property of the franchisor
• In return for a capital investment

A franchise’s place in a brand’s ecosystem

In most franchise agreements, the franchisee gains brand access and the know-how and expertise of its business system — in exchange for an investment and the franchisee’s labor.

This provides a shorter learning curve for franchisees, negating many of the obstacles new businesses face when they start up. It also means that franchisees save money on the development stage of the business idea.

In return, the franchisor can expand its brand into local areas it may not have access to without considerable investment.

The three types of franchises

There are three principal types of franchise agreements. These are:

• Business format type — the franchisor licenses its business format, operating system, and trademark rights.
• Product distribution — the franchisor grants the right to sell or distribute their products using their logo, trade name, and trademarks. Typically sold without an operating system.
• Manufacturing agreement — the franchisor grants the rights to manufacture its products, selling them using its branding and trademarks.

Franchisees are required to comply with strict guidelines for operating the franchise. This helps the parent company maintain control over its brand identity.

How do you pay for a franchise?

In addition to an initial investment, many franchisees pay a regular fee for as long as they own the franchise. In return, they receive continued support, providing marketing assistants and ongoing training.

Franchising isn’t just for fast food!Franchising offers opportunities in a vast array of business disciplines, from accountancy to zoology and everything in between.

So, if you're bored of the grind of the 9-to-5, there is another way to transform your working life.

Check out Franchise Direct Canada's fantastic array of franchise business opportunities, and find a new way to work that will never feel like work ever again.