What Is Franchising?
Franchising is a business arrangement.The franchisor grants the franchise operator (the "franchisee") the right to distribute certain products or services in a particular way, at a particular location,and for specified periods of time.In return, the franchisee pays the franchisor fees and royalties. There are two types of franchise arrangement:
Business Format Franchise
When most people use the term "franchise," they mean a business format franchise. A franchisee buys the right to market and sell particular products or services in connection with an entire system of operation.The franchisee pays the franchisor fees for the right to use the franchisor's trademark and marketing plan. In some cases,the franchisee buys an entire system -- buildings, equipment, supplies, bookkeeping, uniforms, training, and so on. This is known as "turnkey" operation. Fast-food chains are good examples of this kind of franchise. In other cases, the franchisee is not provided with all aspects of the business operation and must provide other items at its own expense under guidelines from the franchisor.
A product franchise is a business arrangement in which the franchisor manufactures and distributes a physical product offered to consumers through retail dealerships. The franchisor/manufacturer specifies to the franchisee/dealer how to conduct the dealership business. Examples include soft drink bottling companies, gasoline stations and automobile dealers.
Advantages of Franchising
The advantages of franchising include access to a successful business model of operation, trademark recognition, management and employee training, ongoing research and development, proven profitability, and a higher business success rate than individual start-ups.