Franchising 101: Franchise Definition

 In Franchising

Franchising involves the sale by a business operator (the franchisor) to an individual or group (the franchisee) of the right to offer, sell, or distribute goods or services under the franchisor’s name, service mark or trademark. Marketing and related operations conducted by the franchisee in dealing with those goods or services are stipulated, wholly or in part, by the franchisor. This allows small businesses to grow at a comparatively rapid rate. The franchise definition is presented below.

Most federal and state laws, including the FTC Rule and state franchise legislation, incorporate three fundamental criteria in their definition of a franchise:

  1. Use of a Name: The franchisor allows the franchisee to operate under a name that is the identifying mark of the franchise system.
  2. Use of a Prescribed System: The franchisee also operates under a stipulated system of operations or marketing plan.
  3. Payment of a Fee: Further, the franchisee pays a direct or indirect fee initially and/or on an ongoing basis.

Franchise Definition

FTC Rule

Source: Franchise Growth Institute

If a business opportunity fits these criteria, then it is a franchise.

More Resources:

4 Reasons You Should Franchise Your Small Business

How to Franchise Your Small Business in 7 Steps

What Does a Franchise Disclosure Document (FDD) Contain?

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