What Is Franchising?

Franchising is a business strategy for getting and keeping customers. It is a marketing system for creating an image in the minds of current and future customers about how the company's products and services can help them. It is a method for distributing products and services that satisfy customer needs.

An individual who purchases and runs a franchise is called a "franchisee." The franchisee purchases a franchise from the "franchisor." The franchisee must follow certain rules and guidelines already established by the franchisor, and in most cases the franchisee must pay an ongoing franchise royalty fee, as well as an up-front, one-time franchise fee to the franchisor.

Franchising extends beyond the right to use a well-branded business name and sell a franchisor's services or products. There are three main types of franchising:

• Product/trade name franchising: A franchisor owns the right to the name or trademark and sells that right to a franchisee.
• Business format franchising: Franchisors provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.
• Distributorships: A parent company grants the right to a franchisee to sell their products.