Some California and Idaho investors might consider opening a franchise as an investment opportunity. But before they do, it’s important to become familiar with what a franchise is.

What is a franchise?

A franchise is contract that outlines a specific type of business relationship between the “franchisor” and “franchisee”. The franchisor is the party who establishes the brands trademark or name, business system, and product. The franchisee is the party who conducts business under the franchisor’s name and system for a fee (or royalty).

Franchising can be seen as the perfect middle ground between owning your own business and working for someone else. If you open a franchise, you are a business owner; you don’t have to clock in or out or answer to a boss – you are the boss! However, you still have quite a bite of guidance as to how to run and operate a business. In a good franchise relationship, you will receive support and training from a franchisor which will enable you to run a successful business. However, it is important to be clear on what everyone’s role is before diving into a franchise relationship.

What type of franchise should you open?

There are two types of franchise relationships. The first, and most common, is Business Format Franchising. In this relationship the franchisee receives an entire system for operating the business from the franchisor. This generally includes site selection, operating manuals, training, brand standards, quality control, marketing strategies, and advisory support. Think of your favorite fast food chain restaurant – it is more than likely owned by a franchisee who started a franchise relationship with the franchisor. The franchisee owns the business but receives guidance and training from the franchisor who has a vested interest in making sure there is brand consistency throughout the city, state, nation, or even world.

The second is traditional or product distribution franchising. In this model the franchisor manufactures the product, and the franchisee sells the product. A franchiser will usually help a franchisee with financing options, location assistance, training and operational guidance, marketing and advertising, and other general support. This type of franchise relationship can look very similar to licensing. However, there are slight differences between the two.

Licensing vs. Franchising

Licensing is a term that is frequently used for contracting purposes. It gives the licensee the right to cooperate with a brand and have access to its intellectual property, branding, and design. The licensee pays a royalty to gain access to this branding and the licensor has the right to tell the licensee how to use the intellectual process. However, unlike a franchise, the licensor cannot tell a licensee how to run their business and will not provide support or training to the licensor.

A franchise can seem very similar to a franchise; however, a franchise is a legal and commercial relationship. In this relationship the franchisee is starting a business using the franchisors trademark and business model. A franchise is an independent branch of the franchise company. But, because it is important for the franchisor to maintain consistency and protect their reputation, they have the right to tell the franchisee how to run their business.

Is the franchise relationship right for you?

If you are considering starting a franchise, be sure to look closely into what support a franchisor will provide to the franchisee and what requirements are imposed on the franchisee. Consider consulting with an attorney to make sure the relationship will ultimately help you reach your business and financial goals.