What is Franchise?

At its most basic level, franchise is a business relationship. In fact, franchise is the most relationally intense business concept that exists. This relationship links a company that wants to distribute a product or service and an entrepreneur who searches for franchise opportunities to run his or her own business. In both types of franchises, the company that sells the rights to distribute a product or use a business format is called the franchisor. The businessperson who buys those rights is called the franchisee.

The company that owns the product or service grants a limited license to the person who wants to sell or distribute that product or service. There are two types of franchises that exist today: product distribution and business format. Product distribution franchises involve an agreement between the manufacturer and entrepreneur granting the rights to sell the manufacturer’s product, but do not operate under the name of the manufacturer.

The more common type of franchise today is called business format franchising; the company offering the franchise provides not only the product or service, but also licenses the entrepreneur, who wants to start the business, an entire system for running that business.

All in all, Franchise is actually referring to:

  • A right granted to a business by a company to use the company’s name and sell or rent its products and services is called a franchise.
  • A license grants permission to engage in a particular business activity.
  • The right to use a brand name and distribute a product is a product distribution franchise.
  • The right to use a brand name and distribute a product plus the systems needed to operate the local business is a business format franchise.
  • The company that sells the right to offer its product or service to a businessperson is the franchisor.
  • The businessperson who buys the right to sell the product or services of another company is the franchisee.

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