Franchise Facts

What is a Franchise?

Franchises are a prevalent force in the market place and many types of industries rely on franchises to distribute their products and services. Although forms of franchising have been in use for over a hundred years, enormous growth has occurred more recently. From real estate companies to fast food and tax services, franchises are a common and successful business model used in numerous industries.

The Better Business Bureau states that a franchise is a method to distribute products or services to consumers. To expand profits and market presence, the company allows for other individuals to buy into the company and expand the business. The franchise is owned and managed by self-employed individuals who have agreed to run the business according to the directions of the franchisor.

Parties Involved

There are two parties in a franchise system, the franchiser and the franchisee. The franchiser owns a trademark, service mark, trade name or advertising symbol. The franchisee is an individual or group who seeks to purchase the right to use that identification in a business.

Franchise Agreement

The franchise agreement governs the methods for conducting business between the two parties.

Two main components of a franchise agreement that are agreed upon are the initial franchise fee and the ongoing royalty fees. These fees are paid to the franchisor by the franchisee and can vary based on the type of franchise you choose to invest in.

There are two types of franchise agreements; a Product/Trade Name Franchise agreement and a Business Format agreement.

In a Product/Name franchise, the franchisor owns the trademark and sells the right to use it to the franchisee. While in a Business Format franchise, a wider range of services such as location selection, staff training, merchandise, marketing support and advice on obtaining financing is also provided.