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What Is a Franchise and How Does it Work?

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Last editedJul 20212 min read

You’ve probably come across the term ‘franchise’ before, but do you actually know what it means? Franchising is a huge part of modern business; it has enabled many entrepreneurs to build wide-scale, lucrative business networks. In this article, we look at what a franchise is in more detail, exploring how the process works, analyzing the different types and identifying some famous examples.

Definition of Franchise 

According to the Cambridge Dictionary, a franchise is a right to market and/or trade a company’s products or services in a particular area using the company’s name. It’s an agreement or license that binds two independent parties. Today, however, franchise is used to describe the business system itself. First and foremost, a franchise is about partnership, and it’s an excellent model to consider if you’re thinking about expansion.

How franchises work ?

In any franchising agreement, there are two parties involved: the franchisor and the franchisee. So what’s the difference between the two? Well, put simply, the franchisor is the individual or corporation that owns the business model or trademark that is licensed to the franchisee. Ergo, the franchisee is the individual or corporation that owns and operates the business using the trademark and business model system licensed from the franchisor. While the franchisor has already established the brand’s name, business model and trademark, the franchisee’s role is to help to expand the business and make it even more successful. Franchisees usually pay the franchisor to use the brand.

How to franchise a business

A franchise is underpinned by a franchise agreement - a business contract between the franchisor and franchisee that outlines the legal rights and obligations of both parties, as well as the payment terms and duration of the agreement.

If you’re thinking about franchising your business or taking a franchise on, you first need to evaluate your goals and weigh up the advantages and disadvantages involved. It is recommended that you undertake your own extensive research and speak to a franchise consultant or other franchises for advice and insights.

What are the types of franchising?

The three main types of franchise are the business format franchise, product distribution franchise and management franchise - and each operates differently.

  • Business format franchise

Perhaps the most common type of franchise, the business format franchise is when a franchisor gives the rights to trademarks, trade names, business process and business model system to the franchisee, for a fee. The franchisor is usually heavily involved in the running of the business, offering continuous support, advice and training, and both parties must adhere to certain guidelines and expectations via the franchise agreement.

  • Product distribution franchise

You could say that this franchise is similar to a supplier-distributor relationship, with the franchisor responsible for creating and providing the product and the franchisee for selling it on. Here, it’s all about the product, as opposed to training and support. There aren’t as many guidelines and restrictions involved, which means the franchisee has much more independence. Similarly to the business format, the franchisee has to pay fees for the usage of trademarks and trade names.

  • Management franchise

A management franchise concentrates on the franchisee managing the franchise. The focus is on business development, overseeing the business and managing the team, as opposed to being heavily involved in carrying out the day-to-day activities. The franchisee is still required to pay fees to use trademarks.

Franchising examples

You can buy a franchise in almost any sector, from hospitality and retail to technology and environmental services. Some of the most recognizable brands are operated as franchises. Some of the best known franchises are:

  • McDonald’s

  • Autosmart

  • Domino’s

  • Pizza Hut

  • Molly Maid

Franchising can be an incredibly profitable form of growth, you just need to ask yourself - is it the right move for my business?

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