by Robert Cresanti, CFE, President and Chief Executive Officer,

International Franchise Association

In your hands is a powerful book that holds essential keys to running a successful franchise business. It is crucial that prospective business owners and entrepreneurs understand how to properly navigate the franchise business model, and Franchise Management For Dummies by Michael Seid, CFE, and Joyce Mazero offers a step-by-step approach to establishing, operating, and expanding your franchise. I’ve had the privilege of working with Michael directly in his role as an active member of the International Franchise Association Board of Directors. When I first joined IFA, I was repeatedly told to first speak with Michael and read his writings about franchising, including the older title, Franchising For Dummies, published a decade ago. His insights served as foundational elements to understanding the business model. To this day, when I need advanced/master crafted counsel on franchise issues, Michael and Joyce are at the top of my “must call” list.

I cannot think of anyone more qualified than Michael and Joyce to write this much-needed book. It contains in-depth information on the history and framework of franchising, including the three types of franchising: traditional, business format, and social. There’s instruction on how to research and select the franchise concept that’s right for you and what to know when franchising to multiple units. It also includes sections on raising capital, choosing and managing locations, conducting legal due diligence, setting up supply chains, hiring, training, acquiring existing franchises, and mapping out exit strategies. There are even chapters for lovers of top ten lists, covering the ten keys to success and ten questions to ask before investing in a franchise.

Applicable to all levels of franchising from a single-unit franchisee to a large franchisor, Franchise Management For Dummies spans the entire life cycle of a franchise business from start to finish.

Franchising is about people and relationships, both inside and outside your organization, which is why the sections on working with fellow franchisors and franchisees is so important. Attracting and keeping customers is another one of my favorites. The lessons in this book go beyond franchising to address how to build relationships and design processes that are beneficial to everyone in the organization.

This book is essential reading for anyone who is seriously examining the road to small business ownership. Michael and Joyce’s deep knowledge of the franchising industry, easy-to-remember terminology, and thought-provoking format makes this the ultimate blueprint for franchising.

According to a January 2017 report from IFA’s Franchise Education and Research Foundation and IHS Markit Economics, employment growth in the franchise sector again outpaced the U.S. economy as a whole in 2016, building on a multi-year trend that is expected to continue in 2017. The franchise business model accounts for nearly 8 million jobs at more than 744,000 establishments in the U.S. alone. It offers a path to business ownership at a reduced risk by using existing brands and operational practices.

I’m grateful to Michael and the IFA Board of Directors for their dedication to protecting, enhancing, and promoting franchising. Franchise Management For Dummies is an extension of these efforts, as it clearly defines franchising, and in doing so lays out the compelling case why the business model is so important to the U.S. economy and throughout the world.

Welcome to Franchise Management For Dummies! In our opinion, it’s not an overstatement to suggest that because of franchising, our lives have improved immensely. We now have access, on seemingly every street in the world, to an ever-growing expanse of high-quality branded products and services delivered consistently from location to location, regardless of where we shop. Franchising is also responsible for creating significant wealth in the United States and globally through local ownership of businesses supported by franchise systems. Each of those locally owned businesses creates jobs that drive our economic health.

Franchising has also become the most important and largest vehicle for training entrepreneurial skills, while providing the “first rung” on the career ladder for many young people. Just consider the sheer number of people whose first jobs were working at a branded franchised location. In addition, in the past few years the methods and standards found in commercial franchising are being applied to many of the health and economic problems in the developing world. Social franchising is a transformational way of delivering products and services to individuals and their families at the base of the economic pyramid (see Chapter 17 for more). Social franchising holds the promise of not just saving countless lives, but of transforming economies that have held people back from achieving a better life for themselves and their communities — not bad for a method intended to create wealth and bring quality products and services to consumers in the industrialized world!

Beyond the Book

As we’ve been bragging about, an abundance of information and guidance on franchise structure and management is provided in this book, but not even we could cover every element in the detail required and still fit it all between these covers. That’s why we offer a whole lot more help and information online — just go to www.dummies.com/go/franchisemanagementfd. This site is chock full of additional information, including more depth on legal issues, advice on structuring your franchise program, tools to help you select and evaluate franchise opportunities, and much more. Check out the Franchise Management For Dummies Cheat Sheet. Simply go to www.dummies.com and type “Franchise Management Cheat Sheet” in the Search box.

Don’t look for the following definitions in any legal journal. We want to give you a sense of what people in franchising mean when they say something — not turn you into a franchise attorney.

acknowledgment of receipt:

Item 23 of the Franchise Disclosure Document (FDD) that is signed by the prospective franchisee and provided to the franchisor (in hard copy or electronically signed) as proof of the date the FDD was received by the prospect.

advertising fee:

Franchise systems advertise to consumers — a lot — and most of the cost of developing the consumer marketing material is paid for out of a fund. Depending on the system, the fund also may pay for the cost of placing the ads you see on TV and hear on radio or elsewhere. The money to produce and place the ads gets there when the franchisee makes a contribution to the fund. That’s what we call the advertising fee.

advertising fund:

See system brand fund.

agent:

A party that has implied or expressed (oral or written) authority to act on behalf of another.

approved advertising materials:

Materials provided by a franchisor for the franchisee’s use in his local market. These may also be materials created by the franchisee that the franchisor has approved for use.

approved site:

A location that the franchisor determines meets its criteria for a location. Site approval does not usually indicate any level of sales or guarantee of the success of the location.

arbitration:

A method of resolving disputes.

area franchisee (multi-unit):

If you want to open and operate many locations and are willing to make the commitment to a franchisor that you’ll develop an agreed-upon number of locations during a defined period — and in a defined territory — you’re an area franchisee. You usually pay an area fee for the rights granted by the franchisor.

authorized or designated supplier:

A supplier of products and/or services who has been approved by the franchisor to sell to franchisees. An approved supplier may be the franchisor or an affiliate company.

broker:

An outside salesperson or firm. For a fee — usually a commission — brokers sell franchises for a franchisor. Some brokers like to call themselves franchise consultants but that’s a misnomer (see franchise consultant, later in this glossary).

business-format franchising (BFF):

Wendy’s, Meineke, and PostNet are business-format franchisors. In a business-format franchise, the most important thing you get from the franchisor is the method to conduct the business. See also product and trade name franchising to understand how BFF differs.

business plan:

A planning document that details the objectives for the business and established processes and the measures for meeting those objectives.

capital required:

The initial investment or required amount of investment necessary to conduct the business.

certification:

Program by which a franchisor or franchisee tests and attests to the ability of a manager or employee to perform certain job functions within the franchisor’s standards. The franchisor or franchisee can usually revoke certification if the manager or employee fails to maintain standards in performing the job function.

churning:

Sometimes franchises fail, and the franchisor becomes the owner of the failed location. In the hands of a non-franchisor, who does not have the ability to franchise the location to another person, the location may be a candidate for closure, if the non-franchisor didn’t think that the location could be turned around. In the hands of some franchisors, though, that location, even with the prospect of continuing failure, is resold, sometimes again and again to new franchisees, who also eventually fail. Churning is not a common practice in franchising, but it does happen. Beware of franchisors that churn.

company-owned location:

The locations owned and operated by a franchisor or affiliate. They should be identical in appearance and operations to those locations operated by the franchisees.

continuous training:

In most franchise systems, you, your managers, and maybe your staff receive initial training when you join the system. In a good franchise system, the training is continuous, meaning that the franchisor offers you training throughout the term of the franchise relationship.

conversion franchisee:

An independent businessperson who agrees to convert her business to the franchisor’s brand and operating procedures. She changes the business name, adopts the franchise system’s methods of operation, and agrees to pay fees.

copyright:

The franchisor’s ownership rights over the manuals and other published materials you use in the system.

culture of compliance:

The franchisor’s culture whereby franchisees and staff do what is right for the system based on a feeling or knowledge that it’s the right thing to do within the company philosophy rather than because it’s in the agreement or someone is watching.

customer information:

Any information gathered by or for the franchisor or its franchisees about an actual or potential customer, including, without limitation, names, addresses, e-mail addresses, telephone numbers, and all other personally identifying information, regardless of whether such information was gathered prior to the commencement of the agreement; customer credit information; billing information; and records. Customer information is usually considered confidential information of the franchisor.

days:

Generally refers to calendar days.

day-to-day management:

As an independent owner, the franchisee is obligated to manage the day-to-day affairs of his business to meet the franchisor’s brand standards.

default:

Generally refers to the failure of either the franchisor or the franchisee to meet their obligations under the franchise agreement.

design:

Includes everything that makes a location look like all the other franchise locations — the layout, colors, signage, logo, and so on.

disclosure document:

Also known in the United States as the Franchise Disclosure Document (FDD). In the United States, all franchisees must receive an FDD at least 14 days before they sign an agreement with the franchisor or write the franchisor a check. Disclosure documents are not required everywhere around the world. In the disclosure document, you find information about the franchisor, including the obligations of the franchisor and the franchise, fees, start-up costs, and other required information about the franchise system.

distributorships:

The right granted by manufacturers or wholesalers to individuals or businesses to sell their products.

financial performance representation:

Generally refers to the Item 19 disclosure made by franchisors in their FDD and unit performance.

exclusive territory:

If a franchisor agrees to give you an area around your location where it will not put another franchise or company-owned location, you have an exclusive territory. The area can be quite small (the four walls of your store) or it can be quite large (cities, counties, states, or countries). Most often, the size is somewhere in the middle.

FDD:

Franchise Disclosure Document. See disclosure document.

feasibility study:

A study of a company that is thinking about becoming a franchisor. The company usually hires a franchise-consulting firm that looks at the company and gives management its opinion on whether the company can become a successful franchisor.

Federal Trade Commission (FTC):

The agency of the U.S. government that regulates franchising.

field consultant:

Field consultants usually work for a franchisor. Their job is to make sure that the franchisees are following the franchisor’s rules. In good systems, field consultants are also responsible for giving the franchisees advice and assistance in running their businesses.

footprint:

The layout of a location, including placement of all furniture, fixtures, and equipment.

franchise:

Every franchise is a license, but not every license is a franchise. Confused? Many people are. A franchise is a special type of license that usually has three elements: (1) The franchisor lets the franchisee use the franchisor’s name and marks, (2) the franchisor provides the franchisee with assistance or has some control over how the franchisee operates the business, and (3) the franchisee pays the franchisor some money. In the United States, the fee is $500 or more during a six-month period.

franchise agreement:

The written contract between the franchisor and franchisee. The franchise agreement tells each party what it’s supposed to do and what it isn’t supposed to do.

franchise attorney:

An attorney who specializes in franchise law.

franchise consultant:

A business advisor with significant knowledge of the design, development, and operation of franchising and the underlying franchise relationship. Some brokers like to call themselves franchise consultants, but that’s a misnomer (see broker, earlier in this glossary).

franchise fee:

When a franchisee signs a franchise agreement, he usually writes a check to the franchisor — that’s the franchise fee. The fee is the cost of joining the system. The fee is typically a flat fee, as opposed to a percentage of sales like the royalty.

franchisee:

The person or company that gets the right from the franchisor to do business under the franchisor’s trademark and trade name.

franchisee in good standing:

A franchisee who is operating her business in full compliance with the franchisor’s operating and other standards per the franchise agreement and is current with all payments due to the franchisor.

franchising:

A method of distribution; in other words, a method of growing a business.

franchisor:

The person or company that grants the franchisee the right to do business under their trademarks or service marks.

gray marketing:

When a franchisee sells or uses products or services obtained through his franchise relationship in another business or sells products or merchandise to another company without the authorization of the franchisor.

gross sales:

Generally the total sales of the business, before the collection of any sales taxes and after specified deductions. Generally used as the basis for percentage royalty calculations.

initial investment:

The initial costs of getting into business, which usually include the franchise fee, the cost of the fixed assets, leasehold improvements, inventory, deposits, other fees and costs, and the working capital required during the start-up period.

inquiry:

Anyone requesting information about a franchise opportunity, whether via the Web site, by telephone, by fax, and so on.

International Franchise Association (IFA):

The industry trade association that represents franchising.

Internet sales:

Any sale initiated and completed on the World Wide Web.

key supplier or vendor:

A supplier with whom the franchisor has negotiated pricing or product availability and whose products or services are an integral part of the franchise system.

lead:

An inquiry who is pre-qualified after the initial interview with a member of the development staff as meeting the minimum criteria to become a franchisee and is invited to submit a franchise application.

location:

The site of the franchised or company-owned operation.

manual:

The bible of a franchise system. The manual is the place to look for instructions on how the franchisor wants the locations to operate and for other policies and recommendations concerning the system.

market introduction program:

Marketing, advertising, and public relations activities used to launch a franchisee’s business. Also known as grand-opening marketing.

master franchisee:

Take a look at the definition of area franchisee. Now, in addition to operating its own locations, the master franchisee also gets the right to sell franchises to subfranchisees within the master franchisee’s specified territory. The master franchisee will have their own FDD and may provide to the subfranchisee some of the services provided by the franchisor and will typically split with the franchisor the franchise fee and royalties paid by the subfranchisee.

multi-unit franchisee:

A franchisee who owns more than one franchise but may not have an area development agreement.

operating principal:

Franchises owned by more than one person that appoint a single individual authorized to make decisions on behalf of the franchisee. This person is the operating principal and is usually the person with whom the franchisor consults regarding the operation and conduct of the franchise.

product and trade name franchising:

Pepsi and Ford are product and trade name franchisors technically called traditional franchisors. In a traditional franchise, the franchisee sells or distributes a specific product using the franchisor’s trademark, trade name, and logo (for example, automobile dealerships, truck dealerships, farm equipment, mobile homes, gasoline service stations, automobile accessories, soda, beer, and bottling), and the product generally needs pre or post sales service. The most important thing you get from the franchisor is the product that the franchisor manufactures, not the system of running the business, as in business-format franchising.

prospect:

A person who has expressed interest in continuing the approval process by completing and submitting the franchise application and whose application has been preliminarily approved by the approval committee or the development director.

protected territory:

Provides certain rights to franchisees within a market area but generally does not prohibit a franchisor from opening additional company or franchisee owned locations near a franchisee.

quality standards:

Some systems have high quality standards; others don’t. If franchisors want to control quality, however, they tell the franchisees what those standards are in their training programs, manuals, and other communications. Quality franchise systems tightly control these standards for the benefit of the franchise system and its franchisees.

registration:

Some states in the U.S. require the franchisor to send the state its disclosure document for approval prior to offering franchises. No registration is required at the federal level.

registration states:

The various states that require franchisors to submit their FDD for approval prior to offering franchises.

retrofranchising or refranchising:

Retrofranchising and refranchising are not the same as churning. These are existing locations that may or may not have ever been franchised before but are currently operated by the franchisor. The franchisor that is retrofranchising or refranchising locations is selling the operating business to a franchisee. In these situations, the franchisor has an expectation that the business will be successful. See also churning.

royalty fee:

The franchisee sends the franchisor a check on a regular basis to stay part of the franchise system. Usually, the payment is based on a percentage of the franchisee’s gross sales, but it can be a fixed fee or calculated on some other basis. That continuing fee is the royalty fee.

service mark:

A mark used to identify the services of one company as distinguished from the services of another. Service marks are afforded similar protection under the law.

single-unit franchise:

A franchisee who owns and operates a single franchise.

start-up costs:

An estimate of the initial investment that the franchisee will make in becoming a franchisee. It’s also known as an Item 7 disclosure. It generally includes the franchise fee, the cost of fixed assets, leasehold improvements, inventory, deposits, other fees and costs, and working capital required during the start-up period.

success:

How do you define success: profit, growth, or return on investment? In some franchise systems, success often simply describes the absence of failure or the closing of a location. It may have nothing at all to do with unit sales or profitability. You can expect your start-up costs to vary based on your market and whether or not your franchisor’s brand is well known in your area.

successor agreement:

The franchisee’s ability to continue in the business for additional terms following a successful completion of their initial term. Also known as renewal.

system brand fund:

Although often confused with an advertising fund, a brand fund generally allows the franchisor to spend the brand fund on more than it can under an advertising fund.

trademark:

The marks, brand name, and logo that identify a franchisor. It’s the name that the franchisor licenses to the franchisee.

turnkey:

A location that a franchisor builds and then sells to a franchisee fully equipped and ready to operate.

IN THIS PART …

Explore a bit of the surprising history of franchising and get to know the roles of franchisor and franchise.

Check out the different kinds of franchised businesses and franchising arrangements.

Understanding the similarities and differences between entrepreneurship and franchising to see if franchising is right for you

Dive into a franchisor’s mandatory legal obligations to prospective franchisees, the franchise disclosure document (FDD), and working with franchise professionals.

What Is a Franchise, Anyway?

Franchising is, in a word, a license. It is a system for independently owned businesses to share a common brand, distribute products and services, and expand. It’s a contractual relationship between a brand owner (the franchisor) and an independent local business owner (the franchisee).

For example, Bright Star Care doesn’t “franchise” medical and non-medical home care assistance, FASTSIGNS does not franchise printing, Wetzel’s Pretzels does not franchise pretzel shops and Dat Dog does not franchise hotdogs, sausages, and beer. What each “franchises” is a system that delivers quality branded products and services to consumers. And they do so through a network of independently owned and operated businesses that deliver a consistent customer experience.

“Dat Dog is an experience,” says Bill DiPaola, president and COO of Dat Dog, based in New Orleans. “It is more than simply the great food and expansive assortment of craft beers that make us successful and that will make our franchisees successful. It is our commitment to community, married with the fun and ‘zany’ culture of Dat Dog, that brings our customers back and that is the approach we expect our franchisees to take in each of their restaurants.”

A franchise occurs when a franchisor licenses its trade name and intellectual property — the brand and its operating methods (its system of doing business) — to a person or group who agrees to operate their business to the franchise system’s brand standards. The franchisor defines the brand promise it wants delivered to consumers, provides the franchisee with initial and continuing support, and then ensures compliance by the franchisee on how it delivers on that brand promise. The magic of franchising is that consistent brand standards can be achieved at each location without the franchisor being involved in the day-to-day management of the franchisee’s business.

In exchange, the franchisee pays an initial franchise fee to join the system and a continuing fee known as a royalty to remain a part of the franchise system.