Franchising is a method for expanding a business and distributing goods and services through a licensing relationship that allows a franchisee (the person or company granted a license) to operate a business under the franchisor’s (the person or company granting the license) trademarks, trade name and business model in exchange for payment. The franchisor specifies the products and services that are offered by the franchisees and provides them with an operating system, brand and support.
From a customer’s perspective, franchises look the same as any other chain of businesses. From a business perspective, franchises and independent businesses operate very differently. The contractual relationship between the franchisee and franchisor leaves the franchisor in charge of the brand while the franchisee actually operates the franchise location and provides services to customers day-to-day. Ideally, the franchise relationship benefits both parties. When done well, franchising makes it easier for the franchisee to succeed in opening a new business and gives the franchisor the support it needs for fast, efficient and cost-effective brand expansion. More details about the costs and benefits of choosing a franchise are available in the rest of our FAQ.
Franchising most often takes one of two forms. The most common, Business Format Franchising, describes a situation where the franchisor provides the franchisee an entire system for operating the business, including the franchisor’s trade name and products and services. Less common, but more robust in terms of total sales, is the Product Distribution Model. Under the Product Distribution Model, the franchisor provides the franchisee with manufactured products, but the franchisee is responsible for determining the business system and for following through on selling the franchisors’ products.
If you’re considering purchasing a franchise, or franchising out your existing business, contact an experienced franchise lawyer to discuss which model suits your unique business environment.