Analyzing the “Franchising” Definition

One of the more appealing contemporary business models is that of franchising. The reason for the success of this business model is encapsulated in the “franchising” definition given in the online Business Dictionary: “Arrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications.”

The “franchising” definition above establishes an important point: Because the “trademark or trade-name” is already in use, and because the franchiser has already established certain “business systems and processes,” the franchisee can skip over the preliminary steps that are typically involved in starting a business. In doing so, the franchisee saves a lot of money and time. The franchisee has, at his or her fingertips, a formula that has already succeeded for others before. It is even possible to do research on other franchisees and see what worked for them and what did not. Franchisee networking is greatly beneficial to them.

Other advantages of franchising follow: any advertising done by the franchisor benefits the franchisee. There is also the fact that franchisees have exclusive rights within a specified territory. So there is no risk that they will have to compete with other franchisees for customers in that area. Another advantage of franchising has to do with financing. Individuals starting businesses often experience difficulty borrowing money from banks because there is no guarantee that they will succeed. Sometimes getting into the franchising business opens the doors for them: Some banks are willing to lend money to franchisees if the franchise in question is reputable.

 

The “Franchising” Definition and the Implied Limitations of the Business Model

 

The “franchising” definition highlighted at the beginning of this article emphasizes the benefits of franchising arrangements. However, there are certain limitations that come with franchising. These are also implied in the “franchising” definition. One such disadvantage is the fact that the franchisee is restricted to following the formula established by the franchisor. Any significant deviations from it would dilute the franchisor’s trademark. Hence individual creativity is somewhat restricted.

Another characteristic of franchising is the fact that the financial aspect of the franchiser-franchisee relationship endures for as long as the franchisee operates the business. Consequently, the franchisee has to share part of the profits with the franchisor. This is only fair. After all, the franchisee continues to benefit from the franchisor’s advertising, training and other franchise-related efforts. Hence, this is not necessarily a disadvantage. Put simply, it is a business expense like any other.