Question

1.     What is franchising?

2.     How does franchising differ from other forms of business ownership?

3.     What is the difference between a product and a trademark franchise and a business format franchise?

Answer 1

1.     What is franchising?

Franchising: Franchising is a type of business ownership having two parties, franchisor and the franchisee. The franchisor is the parent company and franchisee is the semi-independent business owner. In franchising, the franchisee obtains the right to sell the products or services of the franchisor and in return franchisee pays fees and royalties to the franchisor. Thus the franchisee does not have own autonomous business, rather he buys the success package from the franchisor and works on the terms and conditions of the franchisor. The franchisee does not have the right to change the way of running of business by the franchisor. So, franchising is the way of taking the right to use the trademark and selling the products and services of the franchisor on the terms and conditions of franchisor for the fixed fees and royalties.

2.     How does franchising differ from other forms of business ownership?

Franchising is a business structure in which one party who is the franchisee granted privilege of conducting business as an individual owner, though he has to work as per the set guidelines, methods and terms by the other party which is a franchisor. Such kind of business ownership and association is unique and can't be found in other forms of business ownership such as Sole Proprietorship, Partnership, Corporation, and Non-profit corporation.

3.     What is the difference between a product and a trademark franchise and a business format franchise?

Product and trademark franchise

In this kind of franchise system, franchisor acts as manufacturer and franchisees act as distributors. Franchisors allow franchisees to use their brand name and sell the products. In return franchisees get a fixed percentage as commission in the sales revenue generated from selling the products.

This kind of franchisee system is used extensively in automobile and petroleum industry. For example

: - Maruti Suzuki is franchisor in India and there are many franchisees like Autopace, Tricity Autos etc. who use the brand name of Maruti and sell Maruti cars.

- Indian Oil is a franchisor in India selling gasoline and diesel. There are many petrol pumps selling the products of Indian Oil using its brand name

Business format franchise

In this type of franchise system franchisor normally has a successful business model. It allows franchisees to use that business model along with trade name and goodwill of franchisor. In return franchisor takes one time licensing fee and ongoing royalty as a fixed percentage of sales revenue from the franchisee.

This king of franchise system is used extensively in food and education industry. For example: - Kidzee is a successful preschool chain. It offers franchisees of preschools. Franchisees use the name and services of Kidzee in educating kids. Kidzee takes licensing fee and royalty from franchisees