What is franchising?

In a nutshell, franchising is a business system whereunder the franchisor grants a licence to the franchisee to use the franchisor’s diverse intellectual property rights, namely, know-how, designs, brands, trade marks, patents, and trade secrets along with the franchisor’s proven name, reputation and marketing techniques to market the franchisor’s products or services in return for a sum of money. The franchiser provides training and continuous assistance to the franchisee.

How does it differ from distributorship/agency?

The terms franchise, distribution and agency are often loosely used. Distribution and agency are the more traditional forms of distributing goods or services. However, they do not allow the principal to exert any real control over the distributor or the agent. The key distinguishing feature of a franchise is the higher degree of control that a franchisor exercises over a franchisee. The franchiser has a say in all important issues such as branding, methodology and mergers.
Although corporate entities such as subsidiaries or joint ventures allow as much if not more control than a franchise, they entail a much higher financial risk.

The Advantages of Franchising

Why do so many people go the franchise route rather than start their own operation? Although there are significant advantages to following the business-format franchise model, perhaps most important is the knowledge that this is a business model that has proved successful.

Franchisors want their franchisees to succeed so they provide ongoing guidance and training

  • Financing may be easier to obtain for startup and ongoing operations when the trade name and business method are well-known

  • Product lines and suppliers are often selected by the franchisor so there is less time required to shop around and find a reliable distributor, and franchisees can often get price benefits from the collective buying power of the system

  • The franchisor often specifies the computer technology and accounting systems required to run the business, making one less step in the process of getting a business up and running

  • Research and development is typically done by the franchisor, allowing the franchisee to stay competitive and provide its customers with new products and services

  • The franchisor has already determined what type of real estate locations best serve the needs of the business and can often provide guidance to its franchisees

  • Consumers are more likely to shop at or spend money in an operation that is familiar to them, so having a recognizable trade name on the sign is an immediate marketing advantage

  • Any advertising done by the chain is advertising for everyone in the chain. A local unit reaps the benefits of a national advertising campaign