A franchise is an agreement between two parties which gives a person (the franchisee) rights to market a product or service using the system of another business (the franchisor). The franchisee pays the franchisor fees and royalties in exchange for the rights to market the product or service developed by the franchisor. Franchising is therefore not a business but a system used to market and distribute products or services.
There are two general types of franchising. The business format franchising and the product and trade name franchising.
1. Business format franchising
In this format the franchisor gives the franchisee permission to use his product and logo. The franchisee pays an upfront fee and annual royalties in exchange for the business format and trademark of the franchisor. The franchisor will assist the franchisee with the operation of the system, hiring, training, advertising and marketing.
Some examples of this franchise are fastfood restaurants, automotive services and convenience stores.
2. Trade name franchising
This franchise is also called distributorship. The franchisee sells products that are produced by the franchisor. This type of franchise does not always require royalty payments. The franchisor provides logos and advertising campaigns but a limited support system. McDonalds and KFC are using this model and are successful. It proves that a good trademark and the experience of a franchisee could be a good combination.