Introduction to Franchising

Introduction

Franchising is a method of doing business where a franchisor licenses trademarks and methods of doing business to a franchisee in exchange for a recurring royalty fee. Franchisor is the party who grant the franchise while franchisee is the one who purchase the right for franchise. This form of business has a tremendous growth in the last 50 years, started in United States in the 50s and then expanded to Europe. Nowadays, the rest of the world is beginning to implement the euphoria of franchising.

History of franchising

The concept of franchising actually has been applied for centuries. The Pope, in the medieval ages, assigned tax collectors in particular region to collect a certain amount that people earned from their job. In other cases, land lords gave the rights to the people to operate their business in return of rental fees. Although the form of business is different with franchising that we have today, the concept is still the same.

The modern franchising time began in United States after the World War II ended. Returning servicemen and women, with the coming of baby-boom era, had shaped the economy in United States and Europe growing in a rapid pace. The demand for products and services was really in high demand so that they need to find an ideal way to cope with the vast growth of people. This was the period where many franchising giants such as McDonald’s, Kentucky Fried Chicken and Wendy’s started to get bigger and bigger.

What is franchising

Franchising is a system for marketing goods or services. A franchisor grant a license to the franchisee to operate a business under the grantor’s name and system to market the grantor’s product and/or services for a specified period. The renewal regulation usually is subjected by the grantor or sometimes the franchisee also could specify about the duration of the contract, if the grantor accept the term of agreement.

Franchising is very appealing for franchisee because it gives them the opportunity to open businesses for them with less risk. The franchisee then purchases the rights for the franchisor’s name and proven business operation system. In most of cases, franchisor handles advertising and marketing program. For the management side, usually the style of business operation is adapting the local situation or behavior of local people. The franchisee does not have to familiar with the franchisor’s business system since they will be trained and utilized by the franchisor. It is also a mutual relationship between two parties that the franchisor is committed to do business with franchisee since franchisor’s income is dependent

to franchisee’s income. If both sides failed to support each other, neither of them would likely to be unsuccessful.

When a franchisee buys the rights to operate under franchisor’s name, an initial fee is occurred. The initial fee will be used for training and assisting to launch the business and then franchisor and franchisee will be sharing the success story. There will also be a fee for management services by the percentage of profit or gain from supplied goods.

This close interaction between two parties is an important factor to franchising. This make the franchising system is different from other business opportunities, like distributorship or agencies. That is nothing wrong with their systems. For businessmen, they have to understand which opportunities are the most suitable for them if they want to expand their businesses.

How Franchise works?

Basically, franchising would exist if one party agrees to grant the rights for another party to distribute goods or services using the grantor’s trademark, logo or other ‘licensed’ property. The party who grant the rights is known as franchisor and the party that purchases the rights is called franchisee.

There are two basic types of franchising: product franchises and business format franchises. These categories are being used for classification purpose that makes it more convenient to distinguish between these two categories. Sometimes, these categories overlap with each other concepts.

Product Franchise

A product franchise exists if the franchisee bough the rights to sell particular products or services with franchisor’s name. Car dealership and soft drinks bottle makers are two examples of businesses that lie in this category.

Business Format Franchise

Business format franchise is the most popular type of franchise. This type of franchise is exists if