Definition of franchising business practice

Summary

Franchising is a business practice in which a company (the franchisor) licenses its business model to another company or individual (the franchisee). This licensing can include know-how, procedures, intellectual property, and rights to sell branded products and services. In return, the franchisee pays required fees and agrees to follow the obligations and standards set out in a franchise agreement, which typically governs fees, territory, duration, and operating requirements. The franchisor uses franchising as an alternative growth strategy to expanding through corporate-owned outlets, because it can reduce the franchisor’s capital investment and liability risk by relying on franchisees’ resources. The relationship is usually not an equal partnership: franchisors often have legal and economic advantages, while franchisees must comply with standardized branding and operating rules. Franchising is also widely regulated in many jurisdictions, often requiring disclosure documents and setting rules for contract terms and conduct.

Key Points

• 1

  A franchisor licenses its business model and brand (know-how, IP, procedures) to a franchisee in exchange for fees and compliance with a franchise agreement.

• 2

  Franchising helps franchisors grow with less capital investment and reduced liability risk compared with corporate-owned expansion, though the relationship is typically not equal.

• 3

  Franchise arrangements commonly require standardized branding, operating procedures, and disclosure/contract rules, with regulation varying by country.