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Franchising is a mode of business operation wherein an independent business owner adopts the business plan, philosophy and brand label of an existing business. The existing business then operates as a franchisor, granting the independent operator (the franchisee) the right to use and distribute its products under its trademark as part of a franchising agreement. The franchisee also becomes privy to such trade secrets and techniques as are relevant to operating his/her business in a manner consistent to the expected quality of the franchisor.
In exchange for being granted these usages, the franchisee remits to the franchisor a franchising fee - a predetermined percentage of the gross monthly sales garnered by the business, as well as royalty fees for the use of the franchisor's trademark. The franchisee also assumes the responsibility of meeting the standards of quality and upholding the operational procedures set forth by the franchisee. The franchisee may be obligated by the terms of the franchising contract to purchase supplies from accepted sources, conform to certain standards of presentation and practice, and make concessions in the interests of brand uniformity and consistency.
The most commonly thought of franchises involve fully established business strategies and provide the franchisee with only a limited amount of input regarding how to go about running the franchise. Restaurant and grocery chains are ready and obvious examples of this type of franchising. While such entities are certainly franchises, the term "franchise" is not limited to these types of arrangements.
Product or trade name franchising is a somewhat looser form of franchising wherein the franchisee contracts for the right to distribute a brand of product only, without clearly defined guidelines for running his/her business. A prime example of this lies in the realm of vending machine ownership. An owner may enter into a franchising contract to use a specific vending machine for a specific product, such as a trademarked brand of beverage. As with a restaurant or market chain, the franchisee is obligated to uphold certain standards and pays royalties for use of the franchisors trademark. However, in the case of a trade name franchising agreement, the franchisee is neither provided with, nor held to, a rigid business plan. The franchisor grants the franchisee the right to vend the trademarked product, but does not have input as to where the franchisee chooses to place his/her machines, how often the machines are stocked, the frequency of collecting funds from the machines, etc.
Both forms of franchising come with their own associated benefits and drawbacks. A chain franchise may afford a somewhat higher degree of dependability, but offers the business owner only a limited say in the operation of his/her business. On the other hand, a product franchise offers a greater level of autonomy, but relies more on the owner's own good business sense for its success. It is up to the potential franchisee to establish what type of franchising works best with his/her ultimate business goals and the associated risks that he/she deems to be acceptable.