Franchising

A very interesting form of business is franchising, because it combines some advantages of both corporations and small businesses, such as sole proprietorship or partnership. Franchising has become one of the most common ways of conducting business. Automobiles, gasoline, and certain home appliances like refrigerators and washing machines have long been sold through franchise arrangements. The great growth of franchising, however, has come in the last quarter of the XX century. It has become the most common arrangement in providing certain services. This is particularly true in the fast-food industry (for example, McDonald’s Corporation) and motels (Holiday Inns, Inc.), but franchises are also used in many other fields.

The franchising relationship is contractual. The franchiser has developed a product or service or a particular pattern of marketing it, and the franchisee becomes an out­let in what appears to be a regional or national (or even international) chain. The franchiser may conduct its business as a sole proprietorship, partnership, or cor­poration and so may the franchisee. Typically, the franchiser is a corporation, and often the franchisee forms a corporation to own and operate the franchised business.

Franchising may combine the advantages of a small business managed by its owner with the resources, especially marketing impact, available only to large firms. The franchisee may be interested mainly in securing the privilege of selling a highly advertised product. Usually one of the most important advantages of a franchise to the franchisee is the right to use a trademark owned by the franchiser that is well known and/or highly advertised. In addition, many franchisors have developed a standardized and tested method of conducting the business, whether it is producing hamburgers, operating an employment service, or replacing automobile mufflers.

From the franchisee’s standpoint, especially if he or she has had little or no experience in the business being franchised, the most important services of the franchisor are likely to be advertising, training in the business, and advice after the business is underway. Some franchisors also assist with financing. They may build and equip the place of business and lease it to the franchisee – a so-called turnkey operation.

One of the major advantages of franchising for the franchisor is the possibility of rapid expansion by using the financial resources of the franchisees. Through franchis­ing, the franchisor can gain considerable control over the distribution of its products or services without owning the retail outlets. By carefully controlling the number and location of outlets, the franchisor can reduce competition among them and perhaps encourage them not to carry competitive products. This may make the franchise organization’s competition against similar products (or services) more effective by encouraging bigger investments and more aggressive marketing by franchisees. Efforts may also be made to influence prices charged by the franchisee. Where the franchisee prepares a product such as food, or offers a service, the franchisor usually maintains a high degree of control over operations to standardize quality.