Franchise Meaning, Definition and Features of Franchise

Franchise Meaning

Franchise is a local representative of any organization who markets and conducts the entire marketing activity under complete guideline and support of franchisor in the area allotted to the franchisee. It is a kind of authorization granted to an individual or corporation by a franchisor to sell its goods or services in a defined way. The concept of a franchise was originated in USA.

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Franchise is a system of distribution through which the owner of product approaches independent businessmen in selected territories, appoint them as sole franchisee for particular areas and encourage them to distribute the product within the area assigned. The owner called as franchisor retains control over the technique or style with which the product is merchandised. The franchisees are given certain areas and as per the contract the franchisees are expected to promote the sale in a specific manner. The franchisor provides equipment, gives his brand name, undertakes publicity, provide managerial and technical assistance. The franchisee has to adopt selling techniques and see that maximum sale is promoted through his local network.

In simple words, franchise is nothing but a license allowing a person or company to use or sell specific products in certain areas as per agreement.

Definition of Franchise

“Franchise means expanding the business in the new market by transferring trademark and goodwill to franchisee by charging fees.”

Features of Franchise

The characteristics or features of a franchise are mentioned as follows:-

1. Well established business

A franchise is a readymade and well established business that needs expansion. It is a ready form of business seeking expansion in new market areas with the help of a local representative.

2. Needs limited investment

As franchise business is already set up by the franchisor, the initial investment required by the franchisee to enter and establish is relatively low.

3. Easy entry in new markets

As the goodwill and reputation is already set up in other countries, franchisor does not require more efforts to enter in new markets. He is easily accepted in the new markets.

4. Business has large establishments

Franchise has large establishments around the world and operates through a network of local representatives in different market areas.

5. Helps in diverting business risks

By establishing outlets in different parts of the world franchise helps the owner of the firm to diversify his business risks.

6. Results in a large turnover

Franchise results in large volume of sales. Society is benefited by the management of franchisor and service skills of franchisee. Brand name and bumper publicity results in a large turnover.

7. Separates labour and specialisation

Franchise results in division of labour and specialisation. The franchisor concentrates on production, whereas franchisee looks after distribution and service at a unit level. The advantages of division of labour and specialization benefits both.

8. Allows use of brand name and trademark

In franchise selling the franchisor allows the franchisee to use his brand name, trademark, service mark and management skills for developing and expanding franchise business.

9. Business is based on mutual agreement

Franchise business is based on mutual agreement or contract setting out terms and conditions for franchising. Agreement is based on the understanding between franchisor and franchisee. To avoid disputes, agreement should be drafted in a detailed manner.

10. Success needs a long-term relationship

For the successful functioning of a franchise business, both franchisor and franchisee have to remain committed in their long-term relationship, only then business will be mutually rewarding. Strong franchisee relationship enables the franchisor to sell a franchise more effectively, introduce needed changes into the system very easily and motivate franchisee and their managers to provide a consistent level of products and services to their customers.