Definition: A continuing relationship in which a franchisor provides a licensed privilege to the franchisee to do business and offers assistance in organizing, training, merchandising, marketing and managing in return for a monetary consideration. Franchising is a form of business by which the owner (franchisor) of a product, service or method obtains distribution through affiliated dealers (franchisees).

Franchising, much like a marriage, is based on the relationship between the franchisor and the franchisee. The franchisor licenses their business name and operating methods to the franchisee who agrees to follow the terms of the franchising agreement. The franchisor provides leadership, support, and system guidance to ensure a consistent brand image. However, the franchisee pays an initial fee and a continuing royalty based on their gross revenues for this support and guidance.

According to the latest IFA forecast for 2023:

The number of franchise establishments in the United States is expected to increase by 1.6 percent from 792,012 in 2022 to 804,747 in 2023 (an increase of 12,735).

The number of jobs in franchise establishments is projected to increase by 2.2 percent from 9.1 million in 2022 to 9.3 million in 2023 (an increase of 202,000).

The output of franchise establishments in nominal dollars in 2023 is expected to increase by 4.7 percent from $1.024 trillion in 2022 to $1.073 trillion (an increase of $49 billion).

The gross domestic product (GDP) of the franchise sector is projected to increase by 4.5 percent from $570 billion in 2022 to $596 billion in 2023 (an increase of $26 billion). This represents approximately 3.6 percent of U.S. GDP in nominal dollars.

When you invest in a franchise, you're not just buying a business - you're buying the time, effort, and resources that franchisors have invested into developing and supporting their systems and brands.

Think of a franchise system like a recipe for success. By following a proven set of inputs and processes, you can achieve predictable results. This is the key idea in Michael Gerber's book The E-Myth Revisited. Gerber highlights the importance of developing a system for running a business and offering products or services to customers. He uses the example of McDonald's, and how Ray Kroc turned it into a billion-dollar business by implementing a systematic approach to selling hamburgers. Gerber argues that entrepreneurs should work on their business, not in it.

The best franchisors understand how to run a replicable business with consistent, high-quality results. This is essential for surviving and outlasting the competition. Brands are a crucial aspect of franchising. They're not just logos and slogans - they're the psychology and science behind creating a uniform experience and credibility for customers. Brands are incredibly valuable assets for franchisors, and many companies include the value of their brand on their balance sheet. Customers are loyal to brands, not just products, and a strong brand can inspire people to join a community or even get a tattoo of the brand. Franchisors need to ensure that their customers are satisfied every time they visit a franchised location, as their reputation is their most important asset.

In short, a good franchise should have a strong and compelling brand premise.

Think of the franchisor like the parent. It’s role is to give you good guidance and support and keep you from getting into trouble. A franchisor will typically offer the following assistance to a franchisee:

• Financial assistance. Not all franchisors offer financial assistance but some do have financing programs available to franchisees.

• Location selection. Some franchisors will help franchisees select a location for their franchise or may select the location, not allowing the franchisee to choose at all. The benefit of the franchisor selecting the location is that they have experience choosing locations that are successful.

• Training/operations manual. In order to run your business the franchisor provides a detailed operations manual that includes instructions for carrying out their operating system. It establishes the rules, standards and specifications of the franchise and forces the franchisor to organize and define specific job responsibilities and tasks. The manual contains information about the roles of employees in the business; the main processes and protocol; performance and management standards. Before you can open your franchise you may need intensive training about the operating system and business as a whole. Training can take place at the corporate headquarters, so you may need to factor in travel expenses, at your franchise outlet or a combination. Most franchisors offer periodic training and seminars.

• Advertising. Most franchisors initiate advertising efforts, either on a national or local level or both. These initiatives can be in the form of TV and radio commercials, direct mail campaigns and public and media relations efforts. Some franchisors require franchisees to pay into a fund to cover these costs or will offer a co-op arrangement where the costs are split.

• Support. Most franchisors offer ongoing support such administrative (e.g., human resources and accounting) and/or technical support. Many large franchisors have hotlines that franchisees can call for support.

Being part of an established and well-managed franchise system can be rewarding, profitable and provide a level of safety that may not be available to non-franchised independent businesses. As a franchisee, you promise to run your business in the manner that the franchisor dictates. The security of following a tested system has costs and the franchise agreement will spell out that the franchisee will:

• pay the franchisor an initial franchisee fee, not for any product, service or specific assistance, but merely for the privilege of obtaining the franchise and the associated rights, and for the right to obtain the franchisor's know-how to enable the franchisee to operate that business in the most profitable fashion;

• pay the franchisor a continuing royalty in return for the franchisor's continuing assistance and for the on-going privilege of using the franchisor's know-how, systems and methods; at all times conduct the franchised business in strict compliance with the franchisor's standards, procedures, policies and specifications, and to adhere to all such requirements throughout the life of the franchise relationship;

• use the franchisor's name, trademark and service mark; adhere to the franchisor's standard bookkeeping specifications and to submit to the franchisor required reports;

• undergo and successfully complete the franchisor's training program; not divulge to a third party any confidential information, knowledge or know-how conveyed to the franchisee by the franchisor;

• purchase all required products, supplies, and materials only from suppliers designated or approved in writing by the franchisor, or from the franchisor itself;

• not relocate the franchise without first informing the franchisor and, perhaps, procuring the franchisor's approval;

• comply with all employee hiring and training requirements; consent to inspections by franchisor to determine compliance with franchisor's policies and procedures;

• discontinue, upon termination or expiration of the franchise, use of the franchisor's name, trademark and service mark; cease operating or doing business under any name or in any manner which might cause the public to believe that a franchise relationship with the franchisor still exists; and immediately and forever cease using, in any manner, franchisor's trade secrets, procedures, techniques, systems, standards, specifications, and services.