A franchise definition government, in a business sense, is the governing (or regulation) of the use of a defined license to do business using the trademark or the name of a company (the franchisor), or the regulation of a license that grants rights to an entity (the franchisee) to sell the products of a company within the provisions defined by the license.

What Is a Franchise?

A franchise is a license or right given to an entity by a body of authority, such as a government or another corporate entity. Some examples of a franchise are:

  • A bus route
  • A taxi permit
  • A permit for an airline to use a public airport
  • Voters' rights
  • The license to operate a business under a brand name.

Examples of organizations operating as franchises are Kentucky Fried Chicken and Burger King. Further well-known examples include McDonald's, Ace Hardware, Holiday Inn, Amway Distributors, and Rexall Drug Stores.

Other Forms of Franchise

Recently, the word “franchise” has been extended to cover intellectual products as well, especially with books and movie series; for instance, the “Harry Potter" franchise. The franchise concept has developed into a well-thought-out agreement in which the franchisee (the person granted the franchise) undertakes to do business in compliance with the procedures and methods defined by the franchisor (the body of authority that granted the franchise). In addition, the franchisor pledges to help the franchisee through:

  • Promotions
  • Advertising
  • Advisory aid
  • Other features

Product Distribution Franchise and Business Format Franchise

There are fundamentally two kinds of franchise, namely:

  • Product distribution franchise
  • Business format franchise

The major characteristic of the product distribution franchises is that the franchisor manufactures the product. Another attribute that differentiates the product distribution franchise from the business format franchise is that the product distribution franchisor licenses its trademark and logo to the franchisee. However, the franchisor doesn't provide the franchisee the complete system necessary to run the business successfully.

In the business format franchise, the franchisor provides the total system for successfully running the business. In the United States, the majority of franchises are the business format type.

The product distribution franchise is similar to the relationship between a supplier and a dealer. However, in this franchise model, the franchisee benefits more from the franchisor's services than a dealer from its supplier's. In the last couple of decades, franchising has become a necessary part of the landscape of U.S. commerce.

Exclusive and Non-exclusive Franchise

A franchise can be exclusive, but exclusivity is not necessarily an element of a franchise. A non-exclusive franchise, including the one that functions as a public utility, doesn't include the license to enjoy monopoly (freedom from competition). The franchisor who grants a non-exclusive franchise reserves the right to grant a similar franchise to another franchisee, which creates room for competition. However, an entity without a valid franchise isn't permitted to compete with a franchisee that holds a non-exclusive franchise.

A franchisee with a valid franchise can get a court order to stop the unlawful invasion of its franchise by an entity without a valid franchise. A franchisee can also take legal action against such an entity and claim monetary damages if a financial loss occurs as an outcome of the violation of its franchise rights.

Franchisors' Responsibilities

By contract, it's the franchisor's duty to help the franchisee through:

  • Promotions
  • Advertisement
  • Research and development
  • Training and education
  • Quantity purchasing
  • Other specialized resources of management

Franchise Disclosure Law

Before 1979, only a few state legislatures had laws that protected aspiring franchisees from being scammed by dishonest franchisors. The laws, referred to as “franchise disclosure laws,” stated that entities offering the sale of franchises in the state should disclose material facts to help the intending franchisee make an informed decision. These material facts included:

  • The actual cost of running a franchise
  • Any regular expenses
  • Proven reports of profit earned

Inexperienced investors were at the mercy of franchisors in states that didn't have such laws.

A franchisee victimized by a franchisor could take legal action for breach of contract. However, a lawsuit would be an added financial burden for someone who might have invested all of his or her money in an unsuccessful franchise. The FTC (Federal Trade Commission) got several complaints about unfair and dishonest deals in the sale of franchises.

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