Franchising is defined as a form of marketing and distribution in which the franchisor grants to an individual or company the right to run a business selling a product or providing a service under the franchisor's business format and identified by the franchisor's trademark or brand.
What is a Franchisor?
The franchisor owns the overall rights and trademarks of the company and allows its franchisees to use these rights and trademarks to do business. The franchisor usually charges the franchisee an upfront franchise fee for the rights to do business under the franchise name. In addition, the franchisor usually collects an ongoing franchise royalty fee from the franchisee.
***A royalty fee is a set amount of money that a business franchise owner must pay to be part of a franchise system. Usually, the fee is calculated as a percentage of gross or net sales and it is paid weekly, monthly or quarterly. The fees cover the privilege of using the franchise's brand and the money is typically used to help the franchisor (or parent company of the franchise) offset administrative and support functions.
What is franchisee?
An individual who purchases and runs a franchise is called a "franchisee." The franchisee purchases a franchise from the "franchisor." The franchisee must follow certain rules and guidelines already established by the franchisor, and in most cases the franchisee must pay an ongoing franchise royalty fee, as well as an up-front, one-time franchise fee to the franchisor. Franchising has become one of the most popular ways of doing business in today's marketplace. In most states you cannot drive three blocks without seeing a nationally recognized franchise company.
Businesses for which franchising work best have one or several of the following characteristics:
- Ø A good track record of profitability.
- Ø Easily duplicated.
- Ø Detailed systems, processes and procedures.
- Ø Around a unique or unusual concept.
- Ø Broad geographic appeal.
- Ø Relatively easy to operate.
- Ø Relatively inexpensive to operate.
As practiced in retailing, franchising offers franchisees the advantage of starting up quickly based on a proven trademark, and the tooling and infrastructure as opposed to developing them.