Franchising

Franchising, the licensing by a manufacturer or service company of another business to sell its products or provide services under its name. For example, most fast food restaurants and many branches of retail chains are franchises. The term also applies to instances where a patent holder licenses a foreign manufacturer to make its product; for example, many beers are not only made in their countries of origin but also by franchisees in a number of other countries. The terms on which a franchise is granted may involve an initial payment by the franchisee to the franchiser, with future payments based on the franchisee's turnover. Attached to the franchise will be certain conditions; for example, that the franchisee buys supplies only from the franchiser, that the franchise operation meets the same standards and follows the design of other franchises, that the franchisee has exclusive rights to sell the franchiser's goods in a specific area and is not allowed to sell them outside that area, that the franchiser will not give a franchise to anyone else to set up, say, a restaurant or shop within a certain distance of the franchisee's shop or restaurant.

The advantage to the franchiser of operating its business through the method of granting franchises is that, without making all the necessary capital investment, it can expand its business without losing control. The advantage to the franchisee is that of being able to trade under the name of an already well-established brand, without having to spend time and money developing a new business and establishing a successful brand name. As with any business arrangement it is important for both franchiser and franchisee to pay as much attention to the qualities of each other as to the terms of the franchise arrangement. Fast food chains do not want their valuable brand names damaged by franchisees who run restaurants that are dirty, have rude staff, and serve “slow” food. Similarly, franchisees need to be confident that the profits projected by the franchiser are realistic, and that the franchiser will supply and service the franchise operation efficiently, and will fulfil other conditions of the contract.