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What is a franchise?

By Catalogs Editorial Staff

Investing in a franchise business? Tips, history and types of modern franchises

Investing in a franchise business? Tips, history and types of modern franchises

What is a franchise? Essentially, a franchise is a retail service outlet branch of a larger business or corporation. Franchises are similar to chain stores of a larger business entity, which are set up in specific territories or locations to grow a business model and expand a company name.  

Investing in a franchise enables independent, third party investors to quickly start up a retail or service business under the name and trademark of a larger business. Franchisees are also able to take advantage of the the infrastructure and tools of an existing business model, which can be less risky than launching and developing a new business from scratch.  

The word ‘franchise’ is a derivation of the ancient French term ?franc?. Literally translated, franc means ?free.? However, in ancient France, the word was also used to indicate a particular right or privilege.   

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The history of franchising actually began in Europe in the early 1800’s, when ale brewers in Germany granted rights to particular tavern owners to sell their ale.  

Early franchising in America is often attributed to Albert Singer, who founded the Singer Sewing Machine Company, and set up a variety of franchise Singer retail locations in order to sell his sewing machines over a vast territory of the country.

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Franchising grew to become particularly popular in America after World War II, where there was a dramatic rise in the demand for products and services.The Baby Boomer generation has been credited with leading the success of modern franchise businesses. Today, there are three basic varieties of the contemporary franchise business model.

What is a Franchise? Three Types of Modern Franchise Business Systems:

1.   Distributorships: Distributorships merely grant other retail or service locations the right to sell their parent company’s products such as auto dealerships which sell Toyota, Volkswagen, GM, Mercedes, etc.

2.   Trademark or Brand Name Licensing: This model gives the franchise licensees the right to use the parent company’s trademark, name or brand in conjunction with the operation of their own business ie. beverages (Coca Cola) and sport franchises (Miami Dolphins, New York Yankees, etc).

3.   Business Format Franchise: The most common type of franchise is referred to as the standard business format, which includes franchise businesses such as Subway, McDonald’s, and the UPS store.

If you are considering purchasing or investing in a franchise business, understanding the various definitions of ?what is a franchise? is vital. Do your background research to compare the history, economic models and success rates of different franchise businesses. You may also wish to consult with a franchise attorney, who can help you to understand the legal responsibilities and implications associated with franchise businesses.

In the United States, the Federal Trade Commission oversees the operation and regulation of all franchise businesses. Close monitoring of franchise businesses operations is considered to be a key to healthy growth of an economy.  

What is a franchise business’ success rate as compared to the success rate of entrepreneurs who launch new businesses? Research substantiates that the success rate of new franchisees is much higher than that for other new business start-ups. 

Ultimately, the franchising system offers entrepreneurs the opportunity to own and manage their own business, without having to reinvent the wheel.

Resources:
Business Law: Free Advice
Is a Franchise Right for You?

 

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