The following excerpt is from Rick Grossmann’s bookFranchise Bible. Buy it now fromAmazon | Barnes & Noble | IndieBound
The definition of a franchise (taken from the federal definition of a franchise — 16 Code of Federal Regulation 436 et seq.) and paraphrased here is: (a) “franchisor’s” (owner of the trademark) grant to franchisee (person or entity granted the right to use the trademark) of the right to use franchisor’s trademark; (b) for a fee; (c) and franchisor exerts a “significant degree of control over the franchisee’s method of operation,” or “provides significant assistance in the franchisee’s method of operation.”
This model applies to owner/entities that want to start a whole new business and grow a larger equity building business asset. A franchisor can expand and collect fees from others that want to purchase, own and operate a franchised business system that’s offered by the owner/entity and operate under their trademark(s), business systems, training and ongoing support.
Franchise buyers will typically pay a substantial “up front” initial franchise fee (IFF) as well as ongoing royalties and other fees. Royalties usually are a percentage (4 percent to 6 percent) of each franchise owner’s monthly gross revenue. These ongoing fees enable the franchisor to continuously improve the business systems and support the franchise community to help them grow their respective businesses.
Structure options within franchising
One of the advantages of the franchise model is its flexible structure options. These options offer growth benefits to both the franchisor and the franchise owners.
Single-unit franchise
The single-unit franchise is the most common model, where the franchise buyer profile is usually made up of individuals or families that desire business ownership and purchase a single franchise. Some franchise organizations suffer by trying to limit buyers to only multi-unit ownership, which can overburden buyers and result in business failure.
Multi-unit franchise
The good news is that many successful single-unit operators choose to become multi-unit owners. They learn that success with one franchise unit can be duplicated to expand and achieve their goals by utilizing the infrastructure built by the franchisor. You’ll want to make sure that interested franchise owners are vetted by your internal franchise-development team; even though they’re existing franchisees, they need to be qualified for multi-unit ownership. One good franchise is much better than two struggling franchises, so be sure they can handle the added expense and management duties.
Area developers
Franchisees that have the desire, ability and wherewithal…