Many people feel as though they have an understanding of the concept of franchising. However, franchising is a term that is not always used correctly.
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.”
Franchising is a form of marketing and distribution in which the franchisor grants to an individual or group of individuals (the franchisee) the right to run a business selling a product or providing a service under a franchisor's business format. The franchisee is also given permission to use the franchisor's branding and identifying marks under guidelines.
Franchising can also be described as a pooling of resources and capabilities.
For the franchisor, franchising is a way to expand more economically when compared to adding additional company-owned outlets because the franchisee contributes a great deal of the financial investment. On the other side, by investing in a franchise, a franchisee gains the advantage of the knowledge and established systems the franchisor has already been through the learning process with. In addition, the franchisee will also be provided training and support from the franchisor.
Franchising is a comprehensive business relationship, not just a buyer-seller relationship. There is considerable interdependence between the franchisor and the franchisee.
Many franchises fall under the business format category where the franchisor licenses a business format, operating system and trademark to its franchisees. There are two additional types of franchises: product, where the franchisor grants the franchisee permission to sell/distribute a product using their logo, trademark and trade name; and manufacturing, where the franchisor permits the franchisee to manufacture their products (i.e. food) and sell them using their trademark and name.
When the purchase of a franchise is made, the purchaser is required to comply with strict guidelines and rules regarding the operation of the business. These guidelines are in place to protect others within the system and maintain brand consistency. Fees, commonly royalty payments, are collected for as long as the franchisee owns their franchise. In exchange for these payments, the franchisee will receive continued support such as marketing assistance and ongoing training.
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. Name an industry from drug testing to dog walking, and there’s likely a franchise in it.