What is franchising? Definition and examples

Franchising is an arrangement in which the franchisor gives the franchisee the right to distribute and sell the franchisor’s goods or services and use its business name and business model for a specified period, and possibly covering a geographical area.

The franchisor is the owner of the business that provides the product/service, while the franchisee is the person who receives the rights to use the franchisor’s business name, model, etc.

Franchising exists in several forms. According to the Franchising Council of Australia, the most common way franchising is identified is in the “business format franchising”.

In business format franchising the franchisee has the right to sell the franchisor’s goods or services, but also uses the franchisor’s designs, quality control, and training, and also benefits from his/her advertising and promotions, accounting systems, and operating procedures.

Often the supplier of the franchisee’s goods or services is the franchisor. If it is a hotel or travel agency business, the franchisee is also part of the franchisor’s worldwide reservation system.

Franchise
Franchising offers several benefits for both the franchisee and franchisor.

Examples

Examples of franchising relationships include:

  • A manufacturer-to-retailer arrangement – as occurs with car vehicle dealerships. The franchisor supplies the dealership (retailer) with vehicles.
  • A manufacturer-to-wholesaler arrangement – common with soft drinks companies. The franchisor grants the franchisee a license to manufacture and distribute its product(s). This kind of franchise is common when the franchisee is in another country.
  • A wholesaler-to-retailer arrangement – the franchisor (wholesaler) sells products to the franchisee (retailer) who sells them to the general public. This kind of arrangement is common in cooperatives, where the franchisee is, in fact, part of the cooperative (the cooperative is the franchisor).
  • A retailer-to-retailer arrangement – the “classic” business format franchise. The franchisor markets a product (or service) through a network of franchisee retailers.

Franchising is a huge sector of the economy

In the USA, as of 2005, there were 909,253 established franchised businesses. They generated over $880 billion for the national economy and accounted for 8.1% of all private employment (non-farm), a total of 11 million jobs.

According to the International Franchise Association, the franchise industry added 25,060 jobs in the USA in October 2013, representing one-fifth of all new jobs for the month.

Best franchises today

10 best franchises to buy & own 2024, according to blog.xoxoday.com:

  1. McDonald’s – startup costs, $1.3 to $2.3 million.
  2. Subway – startup costs, $187k to $507k.
  3. Dunkin’ Donuts – startup costs, $110k to $1.6 million.
  4. Ben and Jerry’s – startup costs, $113k to $475k.
  5. Ace Hardware – startup costs, $292k to $1.6 million.
  6. 7-Eleven – startup costs, $54k to $1.16 million.
  7. The UPS Store – startup costs, $218k to $477k.
  8. Anytime Fitness – startup costs, $390k to $970k.
  9. Supercuts – startup costs, $150k to $312k.
  10. Jani-King – startup costs, $100 to $220k.

What are the benefits of franchising?

Pros for the franchisor:

  • The business can expand using other people’s money, which not only provides another income (regular royalty payments) but also allows the franchisor to expand more rapidly.
  • The franchisor may have several sources of income, such as franchise fees, franchise royalty fees, training fees, service fees, advertising and franchise marketing fees, rebates from suppliers, and the sales of products and supplies to the franchisees.
  • Being able to open in multiple locations more rapidly gives the franchisor a competitive advantage over other businesses selling similar products or services.
  • The franchisor brings into the company people (franchisees) who are entrepreneurs, full of motivation to succeed.
  • The franchisor needs a smaller central organization compared to a business that owns all the branches. In other words, he or she does not need such a large head office.

Pros for the franchisee:

  • A greater chance of succeeding. Franchising businesses have a much higher success rate than others for people who start in business. However, Entrepreneur disputes this.
  • Get things started more quickly. Depending on the arrangement, in many cases the franchisor comes and sets the whole thing up, including decorating, shelving and equipment.
  • Initial training and then ongoing training.
  • Ongoing support.
  • Help in finding the right premises.
  • Being part of a known brand. In many cases, benefiting from regional or national advertising campaigns.
  • Group purchasing usually results in lower costs.
  • Adopting a proven business model.
  • Many franchisors provide customer leads through websites and centralized call centers.
  • Being part of a network of franchisees.

Disadvantages of franchising

Cons for the franchisor:

  • Loss of ownership – the franchisee has put up money and becomes a kind of partner in the business. A business that owns all its branches has not lost ownership.
  • Loss of territory. In most cases the franchisee will be granted an exclusive territory. If it is not fully exploited, there is not usually much the franchisor can do.
  • You may not be suited to be a franchisor. The resources and skills required are not the same as those needed to manage employees in a branch. You have to be able to lead and motivate independent entrepreneurs. Success as a franchisor thus depends heavily on selecting the right franchisees who are capable and committed to upholding the business’s reputation and standards.
  • Confidentiality – a franchisor will have to divulge more confidential information about the business to franchisees than to employees. Even though a franchisee should have signed a confidentiality agreement, monitoring the provisions of the contract is not easy, and enforcing them can be expensive.

Cons for the franchisee:

  • Lack of independence – goods usually come just from the franchisor, the premises can only be decorated in a certain way, the range of products available for sale are restricted, etc.
  • Lack of control over prices – the company may decide on a nationwide discount on products that may not work in the franchisee’s market.
  • Generally being at the mercy of the company regarding virtually everything. The franchisee must adhere to the franchisor’s stringent operational guidelines to ensure brand consistency across the board.
  • Long-term growth – the franchisee’s ambitions regarding becoming a large business one day may be limited by the franchise setup and the franchisor’s aims.

“Franchising” – a derivative of “franchise”

The word “franchising” is a derivative of “franchise.” There are many other derivatives. Let’s take a look at them, their meanings, and how we can use them in a sentence:

  • Franchise (noun)

A license granted to an individual or group to operate a business under a larger company’s brand and sell its products or services.
Example: “The entrepreneur bought a franchise of a popular fast-food chain.”

  • Franchising (noun)

The practice of using another firm’s successful business model.
Example: “Franchising has allowed her to expand her business across the country rapidly.”

  • Franchisee (noun)

An individual or company that holds a franchise for the sale of goods or the operation of a service.
Example: “As a franchisee, he was required to adhere to the franchisor’s strict operating guidelines.”

  • Franchisor (noun)

A company that grants the license to a third party for the conducting of a business under the franchisor’s marks.
Example: “The franchisor provided marketing and training support to all of its franchisees.”

  • Franchisable (adjective)

Capable of being franchised or suitable for a franchising agreement.
Example: “Her unique restaurant concept was franchisable and attracted several potential investors.”

  • Franchisee-owned (adjective)

Describes a business outlet that is owned by a franchisee.
Example: “The franchisee-owned stores showed more rapid growth than the corporate-owned locations.”

  • Franchise-wide (adjective)

Pertaining to or involving all the franchisees in a franchise system.
Example: “The franchise-wide sale attracted a large number of customers over the weekend.”

  • Franchise agreement (noun)

A legal, binding contract between a franchisor and franchisee, outlining the terms of the franchise.
Example: “Before opening her store, she carefully reviewed the franchise agreement.”

  • Franchisor-led (adjective)

Directed or initiated by the franchisor.
Example: “The franchisor-led initiative aimed to improve customer service across all outlets.”

  • Franchised (verb – past tense)

Granted a franchise to someone.
Example: “He franchised his coffee shop brand to several entrepreneurs in the region.”

  • Franchising (gerund/verb present participle)

Operating a business under a franchised structure.
Example: “Franchising his business was the turning point in his career.”

  • Franchise-holder (noun)

A person or entity that owns a franchise.
Example: “The franchise-holder was responsible for local staffing and daily operations.”

  • Franchise operation (noun)

The way a franchised business runs.
Example: “She was new to the franchise operation but eager to learn.”

  • Franchise royalty (noun)

Regular payment made by a franchisee to the franchisor, usually based on a percentage of gross sales.
Example: “Part of the franchisee’s expenses included a monthly franchise royalty fee.”

  • Non-franchised (adjective)

Not related to or part of a franchise.
Example: “They decided to keep their restaurant non-franchised to maintain complete control over operations.”

Video – What is Franchising?

This interesting video presentation, from our YouTube partner channel – Marketing Business Network, explains what a ‘Franchising’ is using simple and easy-to-understand language and examples.