What Is A Franchise? A Simple Definition

The word ''''''franchise' has been used to describe many different kinds of business relationships. Industries such as fast food, real estate and petroleum are already well recognised in franchising. In recent years, we have seen new entrants involved in such activities as internet services, energy supply, football and banking, bringing with them a whole range of different needs and broadening our perspective on franchising.

A SIMPLE DEFINITION

Given the diversity of businesses that operate under the 'umbrella' of franchising, there are many and various kinds of definitions. In brief, a franchise typically involves the granting by one party (a franchisor) to another party (a franchisee) the right to carry on a particular name or trade mark, according to an identified system, usually within a territory or at a location, for an agreed term. The Government's Franchising Code of Conduct, mandated under the Trade Practices Act (1974), provides a more detailed legal definition of a franchise agreement to assist the business community in determining whether or not the Code applies to them.

DIFFERENT TYPES OF FRANCHISE

Let's consider the most common types of franchise:

A LICENSING OR MANUFACTURING FRANCHISE

A licensing or manufacturing franchise arrangement normally involves a business relationship where the licensor grants to the licensee the right to use certain technology or know-how in manufacturing. If, for example, you own some technology, designs, formulations or other intellectual property then you might decide to license third parties to manufacture your products.

Licensing is often used in the manufacturing sector. We see frequent examples in the information technology industries, soft drink bottling and the automotive industry.

A DISTRIBUTORSHIP

A distributorship is often termed a product franchise. Typically, it involves a relationship where the franchisee is a wholesaler of the franchisor's products within a defined territory, often with a right to use a trade mark or name. Distributors are found in most industries, including: petroleum, food service, confectionery, computer software and building products.

A RESELLER OR DEALER RELATIONSHIP

A reseller or dealer relationship normally also fits into the Product Franchise category. Such parties are usually independent retailers operating from locations authorised by the manufacturer.

In any major business district we see resellers or dealers for major brands of computer hardware, mobile phones, motor vehicles, business equipment and many other products. The Singer Sewing Machine Co. is generally renowned as one of the first product franchisors.

AN AGENCY

An agency might involve wholesaling and/or retailing, often within an identified territory. Agents provide products and services on behalf of the franchisor to the franchisor's customers. We're all familiar with agencies for the post office, the TAB, banks, car rental and insurance companies. In some cases an agency operates as an add-on to an existing, more diversified business (e.g. a newsagency, pharmacy or service station).

THE BUSINESS FORMAT FRANCHISE

The business format franchise might be described as the 'franchise with the lot'. The franchisor offers a comprehensive system for operating the business and permits franchisees to use that full system. Typically, the system includes all essentials for success in the business, including a brand, documented operating procedures, franchisee training, marketing programs, quality assurance systems and franchisee support services. Each franchisee operates according to the standard format specified by the franchisor.

There are, of course, other alternatives. Collectives such as buying groups and marketing cooperatives operate more as common interest groups, often with common branding. They generally lack the degree of management involvement, business disciplines, systems, quality assurance, training and other elements of commitment found in a business format franchise relationship.

The business format franchise is what most people think of when they use the term "franchise". It is used widely in industries such as fast food, convenience food, real estate, automotive servicing, video rental, printing and home services.

Many organisations began with a simple product or service franchise but have since recognised a need to add more key elements to their distributor, reseller or dealer relationships. Such additions have generally achieved the desired outcomes: improving the performance of individual franchised businesses and maximising the franchisor's market opportunity.

Franchise systems have been substantially upgraded - providing more intensive franchisee and staff training, increased advertising and promotional programs, new operations manuals, centralised purchasing arrangements, expanded field support teams and more comprehensive franchise agreements - to underpin the commitment of the parties.

By Robert McComb of Which Franchise? Magazine