There are several terms used in franchising that require explanations. Even the word 'franchising' itself is used every day, but is not always used correctly.
Among the most common definitions of franchising are:
1. A form of marketing and distribution in which the franchisor grants to an individual or company (the franchisee) the right to run a business selling a product or providing a service under the franchisor's business format and identified by the franchisor's trade mark or brand.
2. The British Franchise Association (BFA) defines a franchise as:
"The granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade under the trade mark/trade name of the franchisor and to make use of an entire package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a predetermined basis."
3. Franchising can be described as a pooling of resources and capabilities; the franchisor contributes the initial capital investment, know-how and experience; the franchisee contributes the supplementary capital investment, motivated effort and operating experience in a variety of markets. Franchising is a comprehensive business relationship, not just a buyer-seller relationship. There is considerable interdependence between the franchisor and the franchisee.
4. A business format franchise is where the franchisor licenses a business format, operating system and trademark to his/her franchisee. The franchisor does not always sell products to the franchisee. Business format franchising is found in catering and hotel services, car maintenance, car and truck rental, business services such as accounting and employment agencies, and consumer services such as home cleaning, education and real estate brokerage.
Points to note:
Despite its association with fast food, franchising is not confined to a narrow range of business segments. It is used in many different industries and sectors and is becoming a feature in others.
A modern franchise includes a format for the conduct of the business, a management system for operating the business and a shared trade identity.