There are several terms used in franchising that require explanation. Some, including the word "franchising" itself, are in everyday use but are not always used correctly. Among the most common definitions are:
Franchising which, for our purposes, is a form of marketing and distribution in which the franchisor grants to an individual or company (the franchisee) the right to run a business selling a product or providing a service under the franchisor's business format and identified by the franchisor's trade mark or brand. A modern franchise includes a format for the conduct of the business, a management system for operating the business and a shared trade identity.
Franchising can be described as a pooling of resources and capabilities; the franchisor contributes the initial capital investment, know-how and experience; the franchisee contributes the supplementary capital investment, motivated effort and operating experience in a variety of markets. Franchising is a comprehensive business relationship, not just a buyer-seller relationship. There is considerable interdependence between the franchisor and the franchisee.
Despite its association with fast food, franchising is not confined to a narrow range of business segments. It is used in many different industries and sectors and is becoming a feature in others.
The International Franchise Association defines a franchise as:
"a contractual relationship between the franchisor and the franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee in such areas as know-how and training; wherein the franchisee operates under a common trade name, format or procedure owned by or controlled by the franchisor, and in which the franchisee has made or will make a substantial capital investment in his business from his own resources."
A business format franchise is where the franchisor licenses a business format, operating system and trademark to his/her franchisee. The franchisor does not always sell products to the franchisee. Business format franchising is found in catering and hotel services, car maintenance, car and truck rental, business services such as accounting and employment agencies, and consumer services such as home cleaning, education and real estate brokerage.
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