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What Is A Franchise?

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A franchise is the agreement or license between two legally independent parties which gives:

  • A person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor)
  • The franchisee the right to market a product or service using the operating methods of the franchisor
  • The franchisee the obligation to pay the franchisor fees for these rights
  • The franchisor the obligation to provide rights and support to franchisees

FRANCHISOR FRANCHISEE
Owns trademark or trade name Uses trademark or trade name
Provides Support: Expands business with franchisors support
-(sometimes) financing
-advertising and marketing
-training
Receives Fees Pays Fees

TYPES OF FRANCHISES:

PRODUCT DISTRIBUTION

Product distribution franchises simply sell the franchisor's products and are supplier-dealer relationships. In product distribution franchising, the franchisor licenses its trademark and logo to the franchisees but typically does not provide them with an entire system for running their business.

Although product distribution franchising represents the largest percentage of total retail sales, most franchises available today are business format opportunities.

BUSINESS FORMAT FRANCHISE

Business format franchises , on the other hand, not only use a franchisor's product, service and trademark, but also the complete method to conduct the business itself, such as the marketing plan and operations manuals. Business format franchises are the most common type of franchise.

TYPES OF FRANCHISE ARRANGEMENTS:

Because so many franchisors, industries and range of investments are possible, there are different types of franchise arrangements available to a business owner.

SINGLE-UNIT (DIRECT-UNIT) FRANCHISE

A single-unit (direct-unit) franchise is an agreement where the franchisor grants a franchisee the rights to open and operate ONE franchise unit. This is the simplest and most common type of franchise. It is possible, however, for a franchisee to purchase additional single-unit franchises once the original franchise unit begins to prosper. This is then considered a multiple, single-unit relationship.

MULTI-UNIT FRANCHISE

  • area development
  • master franchise (sub-franchising)
  • AREA DEVELOPMENT FRANCHISE

    Under an area development franchise , a franchisee has the right to open more than one unit during a specific time, within a specified area. For example, a franchisee may agree to open 5 units over a five year period in a specified territory. The franchisor grants the franchisee exclusive rights for the development of that territory.

    MASTER FRANCHISE

    A master franchise agreement gives the franchisee more rights than an area development agreement. In addition to having the right and obligation to open and operate a certain number of units in a defined area, the master franchisee also has the right to sell franchises to other people within the territory, known as sub-franchises. Therefore, the master franchisee takes over many of the tasks, duties and benefits of the franchisor, such as providing support and training, as well as receiving fees and royalties.

    The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


    The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.