Definition:

A franchise is a business model that licenses the rights to operate a business under an existing trademark or service mark. Franchisors grant licenses to franchisees, who pay royalty fees and follow the franchisor’s guidelines.

Key Features:

• Licenses: Franchises grant licenses to franchisees, typically for a fee.
• Trademarks: Franchisors protect their trademarks and brand identity.
• Brand Recognition: Franchises leverage the franchisor’s brand recognition and reputation.
• Centralized Control: Franchisors maintain control over the overall brand and operations.
• Franchise Fees: Franchisees pay royalties and other fees to the franchisor.
• Training and Support: Franchisors provide training and support to franchisees.
• Ongoing Relationship: Franchises and franchisees have an ongoing relationship.

Types of Franchises:

• Traditional Franchises: Licensees operate under the franchisor’s trade name and follow its business model.
• Master Franchises: Grants licenses to other franchisors to operate franchise businesses.
• Area Franchises: Limits the number of franchises in a specific geographical area.
• Home-Based Franchises: Allows franchisees to operate from their homes.

Advantages:

• Brand Recognition: Benefits from the franchisor’s reputation.
• Established Business Model: Provides a proven business model and operational guidelines.
• Marketing and Advertising: Franchisors handle marketing and advertising.
• Potential for Growth: Access to a larger customer base and potential for expansion.

Disadvantages:

• Royalties and Fees: Ongoing fees and royalties can be significant.
• Limited Autonomy: Franchisees have less autonomy in decision-making.
• Brand Dilution: Potential dilution of the franchisor’s brand if franchisees do not adhere to standards.
• Competition: Franchises compete with other businesses in the same industry.

Examples:

McDonald’s, Starbucks, Hilton Hotels, Burger King, and KFC are all examples of franchises.