can be defined as a system based on a close and ongoing collaboration whereby a
company, the franchisor, gets into partnership with one or several companies,
the franchisee(s). Its prime aim is to develop a franchise concept designed in
the first place by the franchisor." (Internet, 1) In order to better
understand the concept of franchising I will first explain several commonly used
terms in this concept. Ø Franchise is a legal agreement that allows one
organization with a product, idea, name or trademark to transmit some rights and
information about a business to an independent business owner, which in return
pays a fee and royalties to the owner. Ø Franchisor is a company that owns a
product, service, trademark or business format and provides this to a business
owner in return for a fee. Franchisor often is the one that makes the conditions
under which a business owner operates, however he doesn’t control the
business. Ø Franchisee is a business owner who purchases a franchise from
franchisor and operates a business using the name, product, business format and
other items provided by the franchisor. Ø Franchise fee is a one time paid fee
by the franchisee to the franchisor, and is paid for rights to use trademark,
management assistance and some other services. Ø Royalty fee is a fee
continuously paid by the franchisee to the franchisor- usually paid as a percent
of gross revenue earned. Ø Franchise trade rule is a law by the Federal Trade

Commission that places several legal requirements on the franchisors Ø

Trademark is a distinctive name or/and symbol used to distinguish a particular
product or service from all the others. In practice we have four types of
franchising- Product Franchise, Manufacturing Franchises, Business Opportunity

Ventures, and Business Format Franchising. In the case of Product Franchise,
manufacturers use the product franchise to govern how a retailer distributes
their product. The manufacturer grants an owner of the store the authority to
distribute goods by the manufacturer and he is allowed to use the name and
trademark of the manufacturer. In return the storeowner has to pay a fee or
purchase some inventory of stock in return for the rights given. Manufacturing

Franchises provide an organization with the right to manufacture a product and
to sell it using the name and the trademark provided by franchisor. This type of
franchising is usually seen in food and beverages industry. Business Opportunity

Venture usually requires that a business owner purchases and distributes the
products for one specific company, which must provide him with the customers. In
return business owner has to pay a fee or some other type of compensation.

Finally, the Business Format Franchising, the most popular type, is the approach
where a company provides a business owner with a proven method for operating a
business using the name and the trademark. The company has to provide assistance
to the owner of the business at the beginning, and the business owner has to pay
a fee in return. Usually people are asking what makes one company to offer a
franchise, so it is important to understand the franchisor’s perspective.

First of all, franchising is an opportunity for more rapid expansion. Many
companies may experience of lack of capital and skilled employees, so the
franchisee can offer all of that. At the beginning the franchisor assists a
franchisee with obtaining financing for a new business, however the franchisee
is liable for repayment of the funds. Franchisor is selecting its franchisees by
their experience and skills, and in that way he/she is minimizing its risks.

Another reason for franchising is higher motivation. This is because when the
company franchises its operations it acquires a group of new, motivated
managers, which are more accountable for actions since as an owners they are
completely responsible for business outcomes. Further more capital is another
reason for getting involved in franchising. The company, by franchising, is
raising the money without selling an interest in the business, and the
franchisor is using the franchisee money for further business expansion. This
way the company is avoiding the risks, which may come out from issuing stock and
taking the loans. The company’s image and name are at certain risk when sold
to other individual. So, a franchisor is very particular about the standards
that franchisees are obliged to meet, and therefore franchisor indicate specific
practices that other party must follow. Because of all that risk the franchisor
reserves the right to buy back the franchise operation. On the other hand
franchisees can take comfort in the fact that most franchisors want to see them
succeed, which is