What is a franchise business term?

If you’re considering taking the plunge into entrepreneurship, you may stumble on the term “franchise.” What is franchising? In reality, a franchise may fulfil your business dreams! 

The idea of franchising isn’t a new one. But it’s a type of business often misunderstood.

Franchising is a huge part of modern business and plays a vital role in many developed countries on our planet. In this article, we’ll take a closer look at what franchising is in more detail. That includes analysing where franchising came from, identifying some famous examples you’re sure to be familiar with, and exploring the different franchises you need to be aware of.

What is a franchise business term?

What Is A Franchise? 

A franchise is a business system in which an established company (known as a franchisor) enlists another party (known as a franchisee) to sell goods, products, or services under its brand name.

In return, the franchisee pays a one-time initial franchise fee and ongoing royalty fees. The number of royalties will, in most cases, depend on how much a franchisee makes in gross sales.

In lay terms, it’s all about buying a ready-made business with a tried-and-true range of processes, IP, etc. But there’s much more to it than that.

There are several different types of franchising agreements, as well as various kinds of franchises.

Similarly, there are other laws and regulations related to franchising, depending on the country and even the state. Local codes can have a significant impact on the definition of franchising.

The Origins of Franchising: 

Where did franchising originate, and where did it all begin?

Franchising all started with an American man named Isaac Singer. In the 1860s, Singer mass-produced his famous sewing machines following the American Civil War and started a successful business operation.

But as we all know, the United States of America is a prominent place. Singer knew this; he realised there was no economical way of repairing and maintaining the machines that his customers had purchased over such a large area.

That being the case, he reached out to mechanics and service shops all over the country, offering them a licence that would allow them to work on his company’s machines under his instructions. They would later go on to become regional salesmen for Singer as well. Thus, with their contract arrangement in place, modern franchising was born.

What is a franchise business term?

Franchising Today:

The first franchise agreement was organised more than 150 years ago, but today, franchising is a powerful, mainstream business mechanism thousands of people use worldwide.

From its humble beginnings, franchising has become an incredible and valuable industry. There are over 1,000 different franchise brands in an impressive range of industries. The sector is only growing, and franchised companies employ more people than ever.

While franchises are typically associated with fast-food chains, the definition of franchising seems to become more varied each year. Footwear stores, retail stores, gyms, children’s nurseries, and mobile phone shops now operate within a franchise network.

Around 90% of franchisees report profitability, with fewer than 4% failing for commercial reasons. Compare that to independent start-ups and businesses, where approximately one in every two will fail and close within their first three years.

The Other Side of the Franchise Definition 

From a legal perspective, franchising is a relationship between you and the company that sells you a licence. Like in any other business partnership, once you become a franchise holder, you have a range of legal obligations to fulfil. Therefore, it’s important to realise you probably won’t be in a position to have the upper hand when operating your new business.

As a franchisee, you are bound by a franchise agreement to meet your franchisor’s operational requirements. These can involve everything from the general way of doing business to what markets you are allowed to cover and which ones you are not.

On top of that, your success largely hinges on your licensor, so the parent company’s problems also affect you.

What is a franchise business term?

How Does A Franchise Work?

A franchise is a form of business that involves an existing business allowing third parties to operate under the same trade/brand name, with access to their sales, distribution or manufacturing channels. Franchises are usually given the provisory that the owner receives a percentage of the profits from sales and a one-off initial fee.

As franchising has developed, so too has its definition, and with that natural evolution, we’ve seen many new and intriguing franchise agreements grow.

The three primary forms of franchises are:

Manufacturing Franchises 

Manufacturing franchises are given licences to produce services and goods with full use of the brand name.

You will find that many food and drink companies use this form of business, as do many wholesalers.

Product Distributor Franchises

Product distribution franchises are when a franchisor gives permission to franchisees to sell their branded products and offers them a licence to use the logo without ongoing support running their business. This is closely related to a seller/supplier relationship, with the significant difference being it’s all branded.

Branded petrol stations often operate as this kind of franchise, with the brand name being used and the fuel being supplied. Everything else is left to the franchisee to decide.

Business Format Franchises 

Business format franchises are the most common type. They involve a business agreement between a franchisor and a franchisee that permits them to operate using the brand name, branding and the same business model. In addition to all that, the franchisee will also be given numerous assets, and guidance and support will be provided as part of this franchise agreement.

These days, however, there are believed to be as many as five different types of franchises.


A job franchise is used by somebody starting a small business, whereas a product or distribution franchise involves large products – like vending machines and cars.

Investment Franchise

Finally, some investors may choose to begin an investment franchise in a hotel or large restaurant. Conversion franchises are rarer and are an emerging type of franchising.

Franchising offers plenty of opportunities to entrepreneurs unable to start from scratch. It saves you the trouble of carrying out market research, building brand awareness, and developing unique business methods. In a franchise, everything has been done for you.

These days, franchising proves to be a trendy way of doing business in many industries, including

  • Automotive
  • Cleaning
  • Care
  • Home Improvement
  • Property & Estate Agency
  • Accountancy and Finance

The Franchise Agreement

The franchise agreement is governed by a business contract and defines everything under the franchising operation for an agreed period. This agreement covers fees, royalties, training, support, marketing assistance, brand value, and more.

Regardless of the definition of franchising, one core aspect of any franchising system is more important than any other: the relationship between the two parties.

Of course, legally binding obligations and rules can be discussed and arranged depending on the business format. But the business relationship is vital: a franchisor must support its franchisees. That way, the franchisees can deliver products and services to the standards set out by the franchisor. When they do, everybody wins.

What is a franchise business term?

Which Companies Offer Franchise Opportunities?

Many of the world’s biggest companies offer franchising opportunities. Most see this as part of building the brand.

Famous Franchising Examples

With options from hospitality to retail, there is no shortage of exciting sectors to franchise. Among the big hitters, there are some genuinely global franchises that many of us would identify as some of the world’s most recognisable brands.

Some of the biggest and most successful companies that offer franchises include

    • McDonald’s
    • Subway
    • Starbucks
    • Domino’s
    • Molly Maid

What is a franchise business term?

Let’s begin with the most famous franchise of them all; McDonald’s. McDonald’s was founded in California way back in 1940. Year by year, the number of franchisees agreeing to open a McDonald’s store has grown, and today there are nearly 40,000 branches worldwide.

KFC and Burger King are two other notable brands in the fast-food industry, and in the United Kingdom, Domino’s and Pizza Hut dominate the fast-food market. But there are a few more exciting types of franchise opportunities too.

Starbucks is another famous American franchise that is ever-present in the United Kingdom. Swarovski dominates the fashion and retail markets, while TaxAssist Accountants are still in the top 30 UK franchises but far less famous.

Where Can You Find Franchises For Sale?

Franchising focuses on business systems and support. With a healthy franchise agreement and a functional relationship in place, they are a great way to gain invaluable entrepreneurial experience and venture into a new industry.

What is franchise simple words?

Put simply, a franchise is the right or licence granted by a company (franchisor) to an individual (franchisee) to market and/or trade products and services in a specific area or territory.

What are the 4 types of franchises?

The five major types of franchises are: job franchise, product franchise, business format franchise, investment franchise and conversion franchise.

What are the 3 types of franchises?

There are three main types of franchise opportunities available, these are:.
Business format franchises..
Product franchises, or Single operator franchises..
Manufacturing franchises..

What is a franchise business examples?

Examples of well-known franchise business models include McDonald's (NYSE: MCD), Subway, United Parcel Service (NYSE: UPS), and H&R Block (NYSE: HRB). In the United States, there are franchise business opportunities available across a wide variety of industries.