Reading Time: 6 minutes
What Is A Franchise?
Suppose you are thinking about taking the plunge into entrepreneurship, you are likely to stumble across the term franchise. But what is the meaning of franchising? Why is it believed to be something that can help you fulfil your boldest business aspirations?
The idea of franchises may not be a new one. But it’s a type of business that’s often misunderstood.
Franchising is a huge part of modern business, and it plays a vital role in many developed countries on our planet. In this article, we’ll take a closer look at what franchising is in more detail. That includes analysing where franchising came from, identifying some famous examples that you’re sure to be familiar with, and exploring the different types of franchises you need to be aware of.
The franchise business definition or franchise meaning is a business system in which an established company (known as a franchisor) licenses another party (known as a franchisee) to sell its products, goods or services under its brand name.
In return, the latter pays a one-time initial franchise fee and ongoing franchise fees (royalties). The number of royalties to be paid to a franchisor on a monthly or yearly basis will, in most cases, depends on how much a franchisee makes in gross sales during a specified period.
In layman’s terms, it’s all about buying a ready-made business that comes with a tried-and-true range of processes, proprietary technologies, and so on.
What is Franchising by Definition?
By definition, a franchise is nothing more than a business technique used to distribute products or services. It’s a marketing concept used by certain companies as a way to expand rapidly.
Sound simple enough? In theory, it is. Strictly speaking, the definition of a franchise is the contract or licence that binds two independent parties. But there’s much more to it than that. These days, the word ‘franchise’ is typically used to describe the business system itself.
There are two key parties involved in any franchising agreement: the franchisor; the franchisee. As part of the franchising definition, a company (the franchisor) will grant an individual (the franchisee) the right or the licence to trade products and services within a particular area. The franchisee is fully permitted to use its trademark and operating methods.
The franchisor has already established the brand’s name and trademark. The franchisee effectively buys into some of that success and helps to expand the business. This is one of the many advantages of a franchising agreement for both parties.
There are several different types of franchising agreements too, and we’ll look into the different kinds of franchises later in the article. Similarly, there are other laws and regulations related to franchising, depending on the country and even the state. Local regulations can have a significant impact on the definition of franchising.
The Origins of Franchising
Now you know a little bit more about the definition and the meaning of franchising. So, where did it all begin? Where did franchising originate?
It all began with an American man named Isaac Singer. In the 1860s, Singer managed to mass-produce his famous sewing machines following the American Civil War and started a successful business operation.
But as we all know, the United States of America is a pretty big place. Singer knew this only too well; he realised that there was no economical way of repairing and maintaining the machines that his customers had purchased over such a large area.
That being the case, he reached out to mechanics and service shops all over the country, offering them a licence that would allow them to work on his company’s machines under his instructions. They would later go on to become regional salesmen for Singer as well. With their contract arrangement in place, modern franchising as we know it today was born.
The first franchising agreement may have been organised more than 150 years ago, but today, franchising is a powerful, mainstream business mechanism used by thousands of people worldwide.
From its humble beginnings, franchising has grown into an incredible and valuable industry. There are more than 1,000 different franchising brands in an impressive range of industries. The sector is only growing, and franchising companies employ more people than ever before.
While franchises are stereotypically associated with fast-food chains, each year, the definition of franchising seems to become more varied. Footwear stores, retail stores, gyms, children’s nurseries, and even mobile phone shops now operate within a franchising network.
Around 90% of franchisees report profitability, with fewer than 4% failing for commercial reasons. Compare that to independent start-ups and businesses, where approximately one in every two will fail and close within their first three years.
The other side of the franchise definition
From a legal perspective, franchising is a form of relationship between you and the company you buy a license from. Like in any other type of business partnership, you are supposed to enter into a contract with a franchisor to become a franchise holder, meaning that you have a range of legal obligations to fulfil. Therefore, it’s important to realise that you probably won’t be in a position to have the upper hand when operating your new business.
As a franchisee, you are bound by a franchise agreement to meet your franchisor’s operational requirements. These can involve everything from the general way of doing business to what markets you are allowed to cover and which ones you are not. On top of that, your success largely hinges on your licensor, so the parent company’s problems affect you as well.
How Does Franchising Work?
A franchise is a form of business that involves an existing business allowing third parties to operate under the same trade/brand name, with access to their sales, distribution or manufacturing channels. Franchises are usually given the provisory that the owner receives a percentage of the profits from sales and a one-off initial fee.
The Different Types of Franchise
As franchising has developed, so too has its definition, and with that natural evolution, we’ve seen many new and intriguing types of franchise agreements develop.
The three primary forms of franchises are:
Manufacturing franchises are given licences to produce services and goods with full use of the brand name. You will find that many food and drink companies use this form of business, as do many wholesalers.
Product Distributor Franchises
Product distribution franchises are when a franchisor gives permission to franchisees to sell their branded products and offers them a licence to use the logo without ongoing support running their business. This is closely related to a seller/supplier kind of relationship, with the significant difference being it’s all branded.
Branded petrol stations often operate as this kind of franchise with the brand name being used and the fuel being supplied. Everything else is left to the franchisee to decide.
Business Format Franchises
Business format franchises are the most common type. They involve a business agreement between a franchisor and a franchisee where they permit them to operate using the brand name, branding and the same business model. In addition to all that, the franchisee will also be given numerous assets, and guidance and support will be provided as part of this particular franchise agreement.
These days, however, there are believed to be as many as five different types of franchises.
A job franchise is used by somebody starting a small business, whereas a product or distribution franchise involves large products – think vending machines and even cars.
The business franchise format is the most common, where the franchisee is permitted to use the franchisor’s trademark. On top of that, the franchisee uses the entire operating system and follows the prescribed marketing plan and procedures. This is most typically associated with the fast-food industry, for example.
Finally, some investors may choose to begin an investment franchise in a hotel or large restaurant. Conversion franchises are rarer and are an emerging type of franchising.
Franchising offers plenty of opportunities to entrepreneurs, which are not available to those who take a start-from-scratch route. It saves you the trouble of carrying out market research, building brand awareness, and developing unique business methods because everything has already been done for you.
These days, franchising proves to be a phenomenally popular way of doing business in many industries, including:
- Building Maintenance
- Home Improvement
- Property & Estate Agency
- Legal and Finance
The Franchise Agreement
The franchise agreement is governed by a business contract and defines everything under the franchising operation for an agreed period. This agreement covers fees, royalties, training, support, marketing assistance, brand value, and much more.
The Franchise Relationship
Regardless of the definition of franchising, there is one core aspect of any franchising system that is more important than any other: the relationship between the two parties.
Of course, there are legally binding obligations and rules that can be discussed and arranged depending on the business format. But the business relationship is key: a franchisor needs to support its franchisees. That way, the franchisees will be able to deliver products and services to the standards set out by the franchisor. And when they do, everybody wins.
Which Companies Offer Franchising Opportunities?
Interestingly, as you are probably aware, some of the world’s biggest companies offer individuals opportunities to start up franchises. Most see this as part of building the brand.
Famous Franchising Examples
There is no shortage of exciting sectors to buy a franchise in, as there are opportunities in everything from hospitality and catering to banking, beauty and retail. Some franchises are more famous than others. Among the big-hitters, there are some genuinely global franchises that many of us would identify as some of the world’s most recognisable brands.
Some of the biggest and most successful companies that offer franchises include:
Let’s begin with the most famous franchise of them all; McDonald’s. McDonald’s was founded in California way back in 1940. Year by year, the number of franchisees agreeing to open a McDonald’s store has grown, and today there are nearly 40,000 branches all over the world.
KFC and Burger King are two other notable brands in the fast-food industry, and in the United Kingdom, Domino’s and Pizza Hut dominate the fast-food market. But there are a few more exciting types of franchise opportunities too.
Starbucks is another famous American franchise that is ever-present in the United Kingdom. Swarovski dominates the fashion and retail markets, while TaxAssist Accountants are still in the top 30 UK franchises but are a far less famous name.
Where Can You Find Franchise Opportunities?
There are various resources, like Franchise Local, where you can look at the franchising opportunities currently available. You may also start one in a specific area if you know a business is not well represented in that location and can convince them there is enough interest.
Whether you had given franchising consideration in the past or not, you now understand a bit more about what is involved in this intriguing and exciting type of business.
Franchising: Powerful by Definition
Franchising focuses on business systems and support. With a healthy franchise agreement and a functional relationship in place, they are a great way to gain invaluable entrepreneurial experience and venture into a new industry.