Basics - What Is A Franchise?
Franchising is a way of doing business. It is a method and marketing tool for companies to expand their market share more rapidly and less expensively.
Some companies, which are thought to franchises, are in fact not franchises. All stores are owned and operated by the company itself (ex. Starbucks, Gap, Victoria's Secret).
There are three basic types of franchises:
- Distributorships, which grant the right to sell their parent company's product(s) such as auto dealerships (Toyota, Ford, GM, Mercedes, etc).
- Trademark or brand name licensing, which gives the licensees the right to use the parent company's trademark or brand in conjunction with the operation of their own business ie. beverages (CocaCola) and sport franchises (Miami Dolphins, New York Yankees, etc).
- Business format franchises, the type most people are familiar with (Subway, Meineke Muffler, Circle K) are the focus of this article.
Business format franchisors offer to their franchisees the license or right to sell its goods or services and/or use its business techniques. The franchisees usually pay an initial fee to acquire this right, and thereafter pay a percentage of their gross sales to the franchisor throughout the term of their franchise contract.
In return for these payments, franchisees gain priveleges, including the right to sell a proven and recognized product or service, to use the franchisor's business practices, and to receive initial training and ongoing support. Additonal responsibilities can and usually do include:
- Requirements to meet a variety of quality controls for products and services sold.
- Restrictions on what they can sell or how they can operate using the company's name.
- Specifications for their business location and site appearance.
- Prohibitions on the operation of any similar businesses during or after the term of the franchise agreement.
Franchisees usually have an advantage over their nonfranchisee competitors, since they have the rights to use the franchisor's:
- Brand names, trademarks, copyrights, trade secrets, and patents.
- Uniform logos, storefronts, and interiors.
By following the franchisor's business practices and offering products that meet the company's standards, franchisees can consistently provide customers with quality goods and services. In the United States the Federal Trade Commission (FTC) and certain states can decide if a franchise is acting as a franchisor. If so, they regulate the activities of the franchisor, as to marketing and sales, and distribution of required disclosure information (Offering Circular aka UFOC) about the franchise to prospective purchasers. Certain other countries have similar regulations. Research has shown that the success rate of new franchisees is much higher than that for other new business start-ups.