What is Franchise?
584 reads · Last updated: December 5, 2024
A franchise is a type of license that grants a franchisee access to a franchisor's proprietary business knowledge, processes, and trademarks, thus allowing the franchisee to sell a product or service under the franchisor's business name. In exchange for acquiring a franchise, the franchisee usually pays the franchisor an initial start-up fee and annual licensing fees.
Definition
Franchising is a license that grants the franchisee the right to use the franchisor's proprietary business knowledge, processes, and trademarks, allowing the franchisee to sell products or services under the franchisor's business name. In exchange for obtaining the franchise, the franchisee typically pays an initial setup fee and annual licensing fees to the franchisor.
Origin
The concept of franchising dates back to the Middle Ages when kings and lords granted privileges to individuals or groups in exchange for taxes or other forms of compensation. The modern form of franchising began to develop in the early 20th century, particularly in the United States, as the fast-food and retail industries grew, making franchising a popular business model.
Categories and Features
Franchising is mainly divided into product distribution franchising and business format franchising. Product distribution franchising primarily involves the sale of products, such as car dealerships. Business format franchising includes a complete business system, like McDonald's and Starbucks. Features of franchising include brand consistency, operational support, and rapid market expansion.
Case Studies
McDonald's is a classic example of franchising. By providing standardized operational processes and brand support, McDonald's franchisees can expand rapidly worldwide. Another example is 7-Eleven, which has established a vast network of convenience stores globally through franchising, offering uniform products and services.
Common Issues
Common issues investors face when considering franchising include the initial investment cost, ongoing royalty fees, and dependency on the franchisor. A common misconception is that franchisees can operate completely independently, whereas they must adhere to the franchisor's standards and processes.
