Franchising is a method whereby a business expands by allowing licensed businesspersons to sell products or services in compliance with the business methods of the franchisor (the business granting the franchise).
The franchisee (the person granted a license to operate the business) sells the franchisor’s products or services in a certain geographical location following the franchisor’s marketing methods. Essentially, a franchisee receives a license to conduct business on the franchisor’s goodwill during the course of the franchise agreement. The transfer of goodwill is more like a lease than a sale in that the franchisee may trade upon it only for a certain time and for a certain price. Examples of franchise businesses are fast food restaurants, motels, and car dealerships.
Advantages of Franchising
One of the advantages of franchising for a franchisor is the expansion of the business with less capital expenditure and no responsibility for oversight of the franchise’s daily operations. An advantage of franchising for the franchisee is that the franchisee enters a business that has a proven market model, brand name recognition and reliable marketing techniques. Franchises have a higher success rate than that of non-franchised businesses. Another advantage of franchising is that most franchisees receive specialized training regarding the operation and maintenance of their business,
Disadvantages of Franchising
Generally speaking, franchise contracts are unilateral contracts that give the most advantage to the franchisor in the event of a conflict between the franchisor and the franchisee. Some franchise contracts and allow the franchisor to terminate or unreasonably refuse to renew the franchise contract, leaving franchisees out in the cold.
The initial start-up costs for a franchise can be expensive. Some franchisees fail to obtain the knowledge and information needed prior to committing to a franchise relationship and find trouble down the road as a result. A franchisee loses a degree of control over the business and must comply with the franchisor’s marketing system. On the other hand, a franchisee can potentially destroy a franchisor’s business goodwill by running the business in an incompetent manner. Overall, the balance of power is tipped in favor of franchisor, not the franchisee.
In the United States, franchises must comply with federal and state franchising laws. The U.S. Federal Trade Commission requires franchisors to disclose purchasing information to potential franchisees in the form of a Uniform Franchise Offering Circular. There are no federal registration requirements, but many states collect franchising information and enforce franchising laws.