What Is a Franchise?
A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business.
Each franchise business has been authorized by a parent company, or franchisor, to sell their goods and/or services either in a retail space or a designated geographical area. The franchisor governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchisor or that meet the franchisor's quality standards. This relationship is regulated by the Federal Trade Commission (FTC).
The popularity of this business model has to do with its proven track record of success and ease in becoming a business owner. Independent businesses have a much higher likelihood of failure within their first year than franchises.
Benefits of franchising
One of the most compelling reasons to buy a franchise is that the franchisor provides business expertise (marketing and advertising plans, management guidance, financing assistance, site location, administrative support, and training) that otherwise would not be available to businesses starting from scratch. Franchisees bring to the relationship entrepreneurial spirit and drive, which may not be enough to keep a business afloat if the franchisee lacks significant business acumen.
Franchising extends beyond the right to use a well-branded business name and sell a franchisor's services or products. There are three main types of franchising:
- Product/trade name franchising: A company owns the right to the name or trademark and sells that right to a franchisee.
- Business format franchising: Franchisors provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing. Examples include McDonald's and Subway.
- Distributorships: A parent company grants the right to a licensee/dealer to sell their products.
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