What Is Franchising

Franchising has been described as a relationship between a company, doing the franchising, and an independent businessperson, in which the businessperson receives a limited "license" to certain rights, characteristics and elements, of the business. In many cases this includes the identity, imagery and operating experiences, of the company doing the franchising.

Essentially, the company who owns or has developed a business or product (the franchisor) grants to others (the franchisees) the ability to offer, sell, or distribute the products or services, which are closely associated with the franchisor's business system, trademark, service mark, trade name logo, advertising formats, or any other commercial symbol.

Business Format Franchising, is the more commonly used form of franchising in today's business environment. Under business format franchises, franchisees purchase essentially a "clone" of the franchisor's business and agree to follow pre-set specifications in its operation.

Franchise ownership can take a number of forms. In addition to the familiar single-unit arrangement, some franchise companies offer Area or Multi-unit Franchises, where the franchisee is expected to develop multiple facilities, in a specific marketplace.

Others offer master franchising or sub-franchising agreements under which a franchise owner in turn offers or sells "sub-franchises" to others. These franchise owners normally receive a percentage of all of the fees which are paid to the franchise company by their sub-franchises.

According to the United States Federal Trade Commission Rule on Franchising (1979), a franchise relationship exists when the following three (3) elements co-exist in the business relationship:

The company doing the franchising:

1. Grants a limited right to use their tradename, servicemark, logo or other advertising symbol,

2. Sells the rights to use "systems" or "methods", associated with operating the "core" business,

and

3. Receives a payment in return for granting these rights (#1 and #2).

In the case where the franchise company is also a manufacturer, the franchisee may only be purchasing rights to distribute specific products, without association with the parent company's name and identity.. Beverage companies, oil companies, and automobile manufacturers, because of the nature of their business relationship with their bottlers and dealers, are considered part of a segment of franchising known as Product Franchising. Using the example of General Motors, their individual dealers market only Buick or Oldsmobile cars, without associating with General Motors

You might be interested to know that when anyone quotes or report on the scope and successes of franchising, the figures do include the significant contribution of the beverage, oil and automobile manufacturing industries.