Definitions of Franchising

The concept of franchising is actually quite straight forward, but clients new to this business model, often ask me to define franchising (or franchise) before we go any further in our discussions of its numerous business advantages.

With this in mind, I thought it would be interesting to provide you with a number of definitions of franchising, all of which vary to some degree. My hope being, that by presenting several credible expressions of the meaning of the word, that you’ll come to more fully understand and appreciate its implications.

A very good place to begin is with the definition put forward by the International Franchise Association:

“A continuing relationship in which the franchisor provides a licensed privilege to do business, plus assistance in organizing, training, merchandising, and management in return for a consideration fee from the franchisee.”

InvestorWords.com provides this interpretation of franchising:

“A form of business organization in which a firm which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor’s trade name and usually with the franchisor’s guidance, in exchange for a fee.”

Dictionary.com provides these three meanings of the word franchise:

1. “The right or license granted by a company to an individual or group to market its products or services in a specific territory.”

2. “A store, restaurant, or other business operating under such a license.”

3. “The territory over which such a license extends.”

Entrepreneur.com, the companion to Entrepreneur magazine, two of the most helpful resources available to prospective franchisees and franchisors, offers this definition of franchising.

“A continuing relationship in which a franchisor provides a licensed privilege to the franchisee to do business and offers assistance in organizing, training, merchandising, marketing and managing in return for a monetary consideration. Franchising is a form of business by which the owner (franchisor) of a product, service or method obtains distribution through affiliated dealers (franchisees)”.

This more expanded definition of franchising comes from BusinessDirectory.com:

“(An) arrangement where one party (the franchisor) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications. The franchisee usually pays a one-time franchise fee plus a percentage of sales revenue as royalty, and gains (1) immediate name recognition, (2) tried and tested products, (3) standard building design and décor, (4) detailed techniques in running and promoting the business, (5) training of employees, and (6) ongoing help in promoting and upgrading of the products. The franchisor gains rapid expansion of business and earnings at minimum capital outlay”.

FranchisingDirect.com offers this definition with additional emphasis placed on the branding aspect of franchising:

“…a form of marketing and distribution in which the franchisor grants to an individual or company (the franchisee) the right to run a business selling a product or providing a service under the franchisor’s business format and identified by the franchisor’s trade mark or brand. A modern franchise includes a format for the conduct of the business, a management system for operating the business and a shared trade identity”.

Finally, The Money Institute defines the word franchise this way:

“A franchise is the agreement or license between two legally independent parties which gives:

• A person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor)

• The franchisee the right to market a product or service using the operating methods of the franchisor

• The franchisee the obligation to pay the franchisor fees for these rights

• The franchisor the obligation to provide rights and support to franchisees”

I hope it’s been helpful for you to see how a variety of business authorities define franchising. The several articulations of the meaning and intent of franchising should give you a fuller appreciation of the special characteristics of this popular and successful method of doing business.