One party gives to the second the right to use of trade mark, production procedures and organizational arrangements and the trade name throughout the duration of the franchise agreement. This agreement regulates the relations between the two sides, including the control of the use of allocated goods. This is also the obligation of full financial compliance of franchisee.
Franchising is a way to organize many outlets in different areas. These facilities are operated by a third party for its own account and in his own interest. They use company marks, emblems, symbols, which guarantee the reputation and high level of services. It is remunerated on the basis of authorizations in the form of concessions and licenses.
The word franchising comes from the Roman culture. The core of the word derives from the French language - "la franchise" - which can be translated as: concession, permission, civil rights or voting rights. Franchising is the actual granting of a franchise, which is defined as a license to operate an individually owned business as if it were part of a chain of outlets or stores. The most popular franchises are: McDonald’s, H&R Block, Dairy Queen and AAMCO Transmissions. The franchisor provides a known business name, management skills, a method of doing business" and the training and required materials. The franchisee contributes labor and capital, operates the franchised business, and agrees to keep the rules of the franchise agreement.
Types of franchising
Franchising arrangements can be divided intro three general categories:
- The first type, one of the oldest, is present in sales of passenger cars and trucks, shoes, paint, farm equipment and petroleum. In this approach, a manufacturer authorises a number of retail stores to sell a certain brand-name item.
- In the second type, a producer authorises distributors to sell a given product to retailers. This franchising arrangement is prevalent in the soft-drink industry such as Coca-Cola Company or Dr.Pepper/Seven-Up Companies.
- In the third type, which is the most typical today, a franchisor supplies brand names, techniques or other services instead of a complete product. This franchising arrangement is common in the industries such as: Holiday Inns, Howard Johnson Company, McDonald’s or KFC.
Other commonly used franchise types are:
- production (technology) - franchisor manages network of specific production technologies, products, and sets area of activity for franchisees. In this case, mostly licensing agreements and know-how transfers are used.
- "turn-key" - franchisor provides premises and business equipment needed for activity. Franchisee receives keys, opens and runs the company, in accordance with the rules and procedures (instructions) that he received from franchisor.
- service - occurs in specific industries, such as catering, hotel services, automotive service. Franchisor sets the conditions for performing certain services.
- distribution (commercial) - consists in the distribution of goods by authorized dealers, which are provided by the organizer of the network acting as unit distribution.
- banking - all sorts of advice among others, from the scope of the establishment, taxation, customs, forms of payment. It is based on a specialized computer information systems Franchisor alone can provide their own banking services, franchisees are entrusted with making their distribution, mainly where the direct presence of the franchisor is not economically justified.
- cooperative - mutual aid of independent companies, which complement each other and form a complementary systems in some areas.
Franchising, regardless of industry, has several common elements: on the one hand, the existence of the company, having values being the subject of franchising. This values can be: trademark, manufacturing procedures, standards and organizational solutions.
On the other hand, the presence of a person or several people, seeking permission to operate the subject of franchising. The agreement combines both parties governing the relations between them, the conditions for the control of the use of the authorization, the amount of the fees for the franchise and franchising item utilization. Franchisors are mostly large companies, known in the market, often multinational corporations. Franchisees are private companies or individuals just starting a business. Most known companies using the system of franchising are: Mc Donalds, Pizza Hut, Burger King, Benetton, Coca-Cola, Pepsi Cola.
Advantages and disadvantages of franchising
- The franchisor’s benefit is fast and well-controlled distribution of products with minimal capital outlay.
- The franchisee’s advantages include: the opportunity to open a business with limited capital, making use of the business experience of others and selling to an existing clientele.
- The main drawbacks affect the franchisee because of the fact that the franchisor retains a great deal of control. The franchisee must pay both an initial franchise fee and a continuing royalty based on sales. The franchisor can also dictate aspects of business such as: design of employee uniforms, decor or types of signs.
- Caves, R. E., & Murphy, W. F. (1976). Franchising: Firms, markets, and intangible assets. Southern Economic Journal, 572-586.
- Kacker, M., Dant, R. P., Emerson, J., & Coughlan, A. T. (2015). How Firm Strategies Impact Size of Partner‐Based Retail Networks: Evidence From Franchising. Journal of Small Business Management.