Business Franchise Definition & Examples

Denise Elizabeth P
Senior Financial Editor & Contributor
Last Updated: July 7, 2021
Date Published: July 6, 2021

A business franchise, also known as franchising, is the process of having products or services distributed through the involvement of a franchisor.

A franchisor is the one in charge of establishing the trademark of the brand or the trade name as well as its business system.

The franchisee pays the cost of royalty with most cases also including an initial fee to obtain the right to conduct business under the name and the system of the franchisor.

In technical terms, a “franchise” is actually referring to the contract that two parties are bound by though the term franchise is commonly used to refer to the actual business in itself and the franchisee who operates that business.

Franchising is the term that is often used to refer to the practice of distributing and creating the brand and the franchise system.

franchise

Types of Franchising Relationships

In general, there are two main types of franchising relationships.

Business Format Franchising

Out of those two main types, it is the Business Format Franchising type that is the easiest to identify.

In a business format type of franchise, it is the franchisor who is responsible for providing the franchisee with a complete system for operating the business so the franchisor’s function does not stop at just providing the products, services and trade name.

As part of a complete system for operating the business, the franchisor will also provide business advisory support, a detailed marketing strategy, quality control, the brand standards, training, manuals for operation, support for development and site selection to the franchisee.

Traditional or Product Distribution Franchising

Traditional or product distribution franchising is the second main type of franchising relationships though it is not identified with franchising as much as the business format purchasing type is.

Despite being linked less to franchising, traditional or product distribution franchising is greater in total sales than that of the business format franchising type.

Some examples of traditional or product distribution franchising can be seen in the industries that entails the businesses of gasoline, bottling, and automotive.

Other industries that typically involve manufacturing are also examples of traditional or product distribution franchising.

Relationships are what Franchising is about

When thinking about the notion of franchising, several people will automatically concentrate first on its legal aspects.

While it cannot be denied that the law is vital even when it comes to franchising, the law is not the focal point of what franchising is.

At the very center, the act of franchising is about the brand value of the franchisor, the support the franchisor extends to its franchisees, the meeting of obligations of the franchisees to dutifully deliver its services or products to the brand standards of the system and most prominently, franchising is about the relationship established between a franchisor and its franchisees.

business franchise

Brands are what Franchising is about

Consumers tend to decide which business they will purchase from and how frequently they will shop at that business based on what they know and perceive about the business’ brand.

It is for this reason that the brand of a franchisor is the asset that is most valuable to it.

A point to consider is how consumers do not particularly concern themselves with who the business is owned by to some extent; rather, a consumer is more concerned with how their expectations of the brand are met.

Becoming a franchisee means learning to develop a relationship with customers in order to have and maintain their loyalty which would encourage repeat purchases from your business.

The quality of the products or services you sell are important to your brand’s success just as much as the personal relationships established with your customers.

It is the brand of the business that customers trust to meet their expectations.

The franchisor and other franchisees involved in the system also rely on you as a fellow franchisee to meet what is expected from the brand.

McDonalds Franchise

Systems and support are what Franchising is about

An indicator of excellent and notable franchisors is its ability to provide the support, tools and systems that their franchisees will need so they too can deliver on the brand standards of the business thus ensuring high customer satisfaction.

It will be expected of you as a franchisee by your franchisor and fellow franchisees to efficiently and effectively manage the daily operations of your business that will be independently owned by you after you are granted brand license.

As a franchisee, you are expected to continue building the reputation of the business in the area you operate in.

When in the market to choose which franchise system you would like to invest in, a good rule of thumb is to research on and evaluate the kind of support the franchisor can provide for you as well as how the franchisor manages to keep up with ever changing expectations of its consumers through the development of its services and products.

There are common services that franchisors would typically provide for franchisees and that includes the following:

  •       Initial and continuous advertising and marketing
  •       Field and headquarters support
  •       Research and development of upcoming services and products
  •       Training for the franchisee and its management team
  •       Site development and site selection assistance
  •       A brand name that is recognized

It is advisable to invest in a franchisor that consistently implements systemic standards well as it is vital to you as a franchisee.

The implementation of brand standards shields franchisees from the possibility of other franchisees committing acts that are detrimental to their reputation.

With the implementation of brand standards, franchisees that share a brand with other franchisees are protected.

Customers view franchise systems as a chain of operations that are branded.

Quality services and products that are offered by one franchisee will benefit the entire system as a whole.

The reverse will also be true.

Franchise Business Model

Franchising is also a Contractual Relationship

From the public point of view, a franchise will not be distinguishable from any other chain of businesses that are branded.

In reality, franchises are quite different from each other.

How a franchise system works is by the franchisee taking on the responsibility and the role of serving the customers while the owner of the franchise brand does not do the management and operations of the locations that are tasked to service the brand’s offers to its customers on a daily basis.

Franchising is essentially a contractual relationship that exists between a licensor in the form of a franchisor and a licensee in the form of a franchisee.

It is this contractual relationship that permits the owner of the business as a franchisee to use the brand of the licensor and its method of conducting business to have services or products distributed to consumers.

Understanding franchising can be perplexing at times since every franchise is a license yet not every license is considered as a franchise in accordance with the law.

A franchise is a certain kind of licensing agreement that is individually defined by numerous states and by the Federal Trade Commission in the United States.

In addition, a franchise will typically exist in the United States when the following conditions are met:

  •       A franchisor fee is paid by the franchisee
  •       The franchisee is provided support by the franchisor as well as the freedom to exercise certain control
  •       The operating methods of the franchisor will identify the marketing of a product or service in the business of the franchisee
  •       The franchisee is licensed the right to use the trade or service mark of the franchisor

How a franchise is defined will differ depending on the state.

There are certain states for example that will include a community of interest or a marketing plan provision in the definition of a franchise.

The interpretation of what a franchise is can differ drastically under each state’s laws thus it is crucial for the budding franchisee to not solely depend on the federal definition of a franchise in comprehending and complying with requirements of any state.

In other words,  a franchise is a business owned by the franchisor who has the ability to license its trade name which is its brand.

Popular examples include McDonalds or Subway.

The franchisor can also license its operating methods which is its system of conducting its business to any group or individual known as the franchisee that will conduct the licensed business within a specified area or location under the terms and conditions for operating that is specified in the contract known as the franchising agreement.

It is the role of the franchisor to provide franchising support and leadership while exercising certain control over the franchisee to guarantee its compliance with the guidelines of the brand.

In return, a franchisee will typically have to pay an initial fee that is charged only once to the franchisor which is known as the franchise fee.

A fee will also be paid continuously which is known as the royalty to permit the franchisee to continually use the trade name and operating methods of the franchisor.

It is the franchisee who is accountable for the daily managing of the licensed business it owns independently.

The franchisee will also be responsible for the outcome of its operations based on its capabilities and performance whether that leads to a profit or a loss.

Making the choice to invest in a franchise or to even become a franchisor yourself can be a worthwhile venture and window of opportunity.

Before you choose which franchise investment you would like to avail of and before you start signing any franchise agreement, it is always recommended to have your research done to understand what franchise system you are getting into and to evaluate what it can offer.

It also would not hurt to have the support of a qualified licensed franchise lawyer.

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  1. International Franchise Association "What is a Franchise?" Page 1 . July 6, 2021

  2. SBA.gov "SBA Franchise Directory" Page 1 . July 6, 2021