Franchising

Franchising is a business model in which a franchisor grants the independent operator the right to distribute its products, techniques, and trademarks for a percentage of gross monthly sales and a royalty fee. Various tangibles and intangibles such as national or international advertising, training, and other support services are commonly made available by the franchisor.

History of Franchising

The concept of franchising can be traced back to the Middle Ages when landowners made franchise-like agreements with tax collectors, who retained a percentage of the money they collected and turned the rest over. The practice ended around 1562 but spread to other endeavors.

In the 19th century, the franchising business model was used by both the Singer Sewing Machine Company and the Coca-Cola Company.

Modern Day Franchising

Modern franchising came to prominence with the rise of franchise-based food service establishments. This trend started as early as 1919 with quick-service restaurants such as A&W Restaurants and White Castle. Today, franchising is available in almost every industry sector, including such diverse areas as retail, health care, education, and even professional services firms, to name a few.

Franchising Models

There are two different types of franchising relationships. Business Format Franchising is the most common form and comprises about 80% of the franchising industry. It involves a broader relationship between the franchisor and franchisee, including not only product distribution, but also the complete method to conduct the business itself.

Product Distribution Franchising is the second type of franchising. A product distribution franchise is simply a supplier-dealer relationship. Examples of product distribution franchising can be found in the bottling, gasoline, automotive, and other manufacturing industries.

Advantages and Disadvantages of Franchising

Franchising offers franchisees the advantage of starting up a new business quickly based on a proven trademark and formula of doing business, as opposed to having to build a new business and brand from scratch. It is often hard to raise capital for a new business, and franchising is a way of attracting finance for a new venture.

However, franchising is not an automatic ticket to success. The cost to start a franchise can be substantial. In addition, the franchisee must operate their business according to the procedures set forth by the franchisor.

See Also

• Business model
• Franchise disclosure document
• Franchise agreement
• Franchise fee
• Franchise law
• Franchise consultant

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