What is Franchising?

It helps to begin with an understanding of what 'franchising' really means. In basic terms, franchising is a form of distribution or marketing. It is a method of doing business by which the franchisee is granted the right to offer, sell or distribute goods or services under a marketing plan or system prescribed in substantial art by the franchisor. It is a strategy for successfully penetrating, developing, dominating and achieving a disproportionately large market share.

The franchisor is the company that owns and controls the franchise system and grants the license to operate the franchise according to a certain method, and with the products and/or services that have been developed by the franchisor.

The franchisee is the company or person who pays the franchisor for the franchise and the right to use the system.

The franchise is the right to use the trademarks and systems, and to promote the products and/or services.

Types of Franchises

The term "franchise" is used to describe several different types of agreements, although its current definition places the emphasis on the continuing relationship between the franchisor and the franchisee. Most franchises fall under the classification of product or service, or business format. Although franchises will generally lean more heavily towards one or the other, they typically combine characteristics from both categories.

Product or Service Franchise

Early franchises were generally "Trade Name" franchises. The franchisor allowed the franchisee to distribute goods utilizing the franchisor's trademark. This type of licensing arrangement includes such business as car and truck dealers, soft drink bottlers, home entertainment stores and service stations.

Generally, the franchisee was required to conform to certain standards relating to the quality of the product or service, but apart from that he or she was free to carry on business without any control or guidance from the franchisor.

Business Format Franchise

Business-format franchising is the most common form of franchising and involves not only the licensing of a product or service, but provides the method for running the business. Real estate companies, diet centres and travel agencies are examples of business-format franchises. Fast food franchises often combine product and business-format franchising. In fact, most of today's franchises combine product and business formats.