Special Edition: What Is Franchising?

It's a partnership that works together to create a unique and successful method of product and service distribution

Franchising...it's not a business, but rather, a way of doing business. It's a unique, and usually highly effective, method of distribution for all kinds of products, goods, and services. It's also an industry that generates $1.5 trillion dollars in annual sales.

According to the U.S. government's definition, a franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise dictates and governs the way business is done between the two parties. Generally, a franchisee sells goods or services supplied by the franchiser or that meet the franchiser's quality standards.

It's a partnership that is built upon, and requires, teamwork. It's a way of doing business that is based on mutual trust between the franchiser and franchisee. Everybody brings something to the table. The franchisor provides the business expertise (the marketing plans, the management guidance, financing assistance, site location, training, etc.) that otherwise would not be available to the franchisee. Meanwhile, the franchisee brings the entrepreneurial spirit and drive necessary to make the franchise a success. When franchise products and services are sold, both parties reap rewards from the profits.

There are essentially two types of franchising:

1. Product/trade name franchising
2. Business format franchising

In the first type, which is the most basic kind of franchising, a franchisor owns the right to the name or trademark and sells that right to a franchisee. We'll refer to this as product/trade name franchising. Product distribution franchises sell the franchisor's products and are supplier-dealer relationships. Generally, the franchisor licenses the use of its trademark to the franchisee but may not in all cases provide the franchisee with a system for running its business. Examples of product distribution franchises are soft drink distributors, automobile dealerships, and gas stations.

The more complex form of franchising, called business format franchising, involves a broader ongoing relationship between the two parties. Business format franchises often provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing. Business format franchises not only sell the franchisor's products or services, with the franchisor's trademark, but operate the business according to a system provided by the franchisor. The franchisor provides training, marketing materials, and an operations manual to the franchisee. There are many examples of business format franchises. Businesses like quick service restaurants, automotive services, lodging, real estate agents, convenience stores, and tax preparation services, are just a few examples of business format franchising.

Often, franchise companies will have units that are operated by franchisees as well as units that are operated by corporate employees (ie., company-owned stores). More than 75 percent of franchised units are operated by franchisees. Franchising is such a great way of doing business because the product or service has been developed and proven utilizing a successful way of doing business, there's an effective marketing and distribution system in place, and the brand or trade name is widely identified, recognized, and easily promoted. After all, most of us are creatures of habit and comfort. We look for things we recognize.

Franchising has become one of the most popular ways to grow a business in the United States. Government research has been documenting franchising's growth since the 1970s. And it shows no signs of slowing down.

Want proof in hard numbers? Consider that there are more than 2,500 franchise systems operating well over a half million franchise units in more than 75 industries in the U.S. That's about 3.2 percent of the total businesses. And this 3.2 percent of all businesses controls over 35 percent of all retail and service revenue in the U.S.

So what is franchising? It's a way of doing business that allows individuals to operate a business without being completely on their own. The franchise way offers the benefits of opening quickly, experiencing success more rapidly, developing a customer base faster, reducing risk and being more profitable.

Sounds like a good way to do business.