What Is a “Franchise”?

I used to think I had a clear definition of what a franchise was.  In recent years the term franchise has been applied to a number of different ways to operate as well as to the role of the owner.

If we look at McDonalds, Burger King, etc or brands outside of food such as hotels, gas stations or convenience stores we can see what the traditional use of the term meant:  A franchisee paid a franchise fee to become a franchisee where they got to use the systems and brand of the franchisor.  Additionally, they would receive training and ongoing support, and for that they would pay some sort of an ongoing royalty.  They franchisee would cover the cost to build a business they could keep the profits from until they were ready to sell it, then they would get the full proceeds of the sale.  There were other components, but those are the basics.

Now we see the term used in many different ways.

I have seen online Multi Level Marketers using the term “Online Franchise” or “Virtual Franchise”; I would contend that they are not a franchise.  They don’t register as one, they don’t have an FDD, they don’t adhere to any of the regulations and their businesses are typically operating under a very different model. 

But that does not mean that everyone using the term is as far from the definition we are used to.

I was just working with one of my candidates and a franchisor that offers a special program where they will become 50/50 partners with franchise candidates that they feel could be top producers but may not have a deep cash reserve.  In that model there is an initial payment to the franchisor that gets paid back over the next two years, then the bulk of the costs for the business (office, staff, vehicles, equipment, etc) are paid by the franchisor.  While it has not been traditional for franchisors to partner beyond the franchisor/franchisee roles, this is still well within the franchise definition.  The franchisee still has an up front cost, has equity, still pays royalty, still gets training and support from the franchisor.  The difference is more on the partnership side.

Where the definition does change is in a model like Chick-fil-A, where their old “Managing Partner” role is now called a “Franchise”. In that model the franchisee pays $10,000 up front and it is placed in a hold/escrow account for them. They run a business that Chick-Fil-A owns and get a share of the profits.  The better they run it the more they make. The franchisee does not own the business and can not sell it.  When they leave they simply get their $10,000 back. If you want to be a well-paid restaurant manager and don’t need to own the business, this is a great option.

I was recently contacted by someone very excited to try to sell me “Robot frozen yogurt vending machines”. I found it interesting that the vending world is reinventing itself. 

For years the main income streams for companies selling vending opportunities were the sale of the machine and the service to get it placed in a location that it might produce some revenue.

On occasion we would see a vending offering where there was some sort of proprietary product involved that might be a third revenue stream.

Now we are seeing vending rolled into a franchise model where the three old revenue streams may still be in place but now there may be a franchise fee, a royalty and maybe even an advertising fund.

I have not look at the model to see if there is enough business there to support the added costs. Under a traditional franchise model you get a lot of added support and training, but that may not be needed in a vending model that typically only requires counting change and filling the machine with product.  Although, there might need to be training to teach the franchisees how to fix the yogurt robots when they are not functioning properly and they want to get them back to generating revenue.

There are others that I have not gotten to here, but as you run across them just keep in mind that expert advice and a lot of due diligence is often a good starting point to figuring out if what you are interested in is a solid franchise that can do what you need it to do in your pursuit of success.

It is important to know what type of business you want to build, if you want to control it and if you want to sell it when you are ready to move on.  Those answers will now play a growing role in what you pick.

What is your success story?  Let’s go find it!

George Knauf is a highly sought after, trusted advisor to many companies; Public, Independent and Franchised, of all sizes and in many markets. His 20 plus years of experience in both start-up and mature business operations makes him uniquely qualified to advise individuals that have dreamed of going into business for themselves in order to gain more control, independence, time flexibility and to be able to earn in proportion to their real contribution. Contact the Franchising USA Expert George’s Hotline 703-424-2980.


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