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A primer on the business of franchising including advantages and disadvantages of owning a franchise business, tips on how to investigate a franchise opportunity, and how to determine if franchising is right for you.

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What is Franchising?

Franchising is simply a method of distributing goods or services. It involves three elements:

• the Franchisor: a person or company that grants to others a right or license to engage in business using their trademark or tradename;
• the Franchisee: the person or company who pays royalties and often an initial fee to get the right from the franchisor to do business under the franchisor’s trademark or tradename;
• the Franchise: technically refers to the contract granting the right or licence to engage in business under the franchisor’s trademark or tradename. It is also commonly used to mean the actual business that the franchisee operates.

Franchising can be divided into two broad categories, commonly known as “product franchising” and “business format franchising”. In product franchising the franchisor licences the franchisee to sell the franchisors trademark products and services, but typically does not provide the franchisee with the entire system for running their business. The franchisor imposes limited controls and provides limited assistance to the franchisee. This type of franchise relationship is similar to a supplier-distributor relationship, the main difference being the identification of the franchisee with the franchisor’s trademark.

“Business format franchising” is the most common form of franchising and is characterized by an intimate business relationship between the franchisor and the franchisee. In business format franchising, not only is the franchisee granted a licence to sell the franchisor’s particular trademark good and services, but the franchisee is also licenced to use the franchisors comprehensive business system (format), including the operating and marketing systems. Business format franchising is characterized by comprehensive support provided by the franchisor to the franchisee which may include: site selection and analysis; design and construction; financing services; training; local, regional or national advertising; volume purchasing; operating procedures and operating assistance; and advice, guidance, and continuing support in all aspects of operating the franchise. The effect of business format franchising is that there is almost a complete merging of the business identities of the franchisor and the franchisee so that the public perceives each individual franchise outlet as part of the larger chain of identical outlets, offering the same goods and services. In order to maintain this public image, the franchisor imposes extensive continuing controls on the franchisee’s business operations.

Read on to learn more.

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