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What is Franchising?

Franchising is not a business itself, but a way of doing business.

It is essentially a marketing concept - an innovative method of distributing goods and services. It is also an extremely successful and rapidly growing aspect of Australia's small business sector.

Franchising is a business relationship in which the franchisor (the owner of the business providing the product or service) assigns to independent people (the franchisees) the right to market and distribute the franchisor's goods or service, and to use the business name for a fixed period of time. The International Franchise Association defines franchising as a "continuing relationship in which the franchisor provides a licensed privilege to do business, plus assistance in organising training, merchandising and management in return for a consideration from the franchisee".

"Franchising" is used to describe a number of business models, the most commonly identified of which is "business format franchising". But there are other models which are also dependent on franchise relationships. These include:

  1. Manufacturer-Retailer: Where the retailer as franchisee sells the franchisor's product directly to the public. (eg. New motor vehicle dealerships).
  2. Manufacturer-Wholesaler: Where the franchisee under license manufactures and distributes the franchisor's product (eg. Soft drink bottling arrangements).
  3. Wholesaler-Retailer: Where the retailer as franchisee purchases products for retail sale from a franchisor wholesaler (frequently a cooperative of the franchisee retailers who have formed a wholesaling company through which they are contractually obliged to purchase. eg. Hardware and automotive product stores).
  4. Retailer-Retailer: Where the franchisor markets a service, or a product, under a common name and standardised system, through a network of franchisees. This is the classic business format franchise.

The first two categories above are often referred to as product and tradename franchises. These include arrangements in which franchisees are granted the right to distribute a manufacturer's product within a specified territory or at a specific location, generally with the use of the manufacturer's identifying name or trademark, in exchange for fees or royalties.

The business format franchise, however, differs from product and tradename franchises through the use of a format, or a comprehensive system for the conduct of the business, including such elements as business planning, management system, location, appearance and image, and quality of goods.

Standardisation, consistency and uniformity across all aspects are hallmarks of the business format franchise.

Business format franchising is today the fastest-growing segment of franchising and has spread to virtually every sector of the economy in Australia. It has significantly more franchise systems, more outlets, more employees and more opportunities than product and tradename franchises.

Business format franchising requires a unique relationship between the franchisor (the owner of the system) and the franchisee (the owner of the individual outlet), which is commonly referred to as a "commercial marriage".

This ongoing business relationship includes the product, service and trademark, as well as the entire business concept itself from marketing strategy and plan, operational standards, systems and formats, to training, quality control and ongoing assistance, guidance and supervision.

In short, it provides small business (the franchisee) with the tools of big business (provided by the franchisor).

It is also a Win-Win relationship where the franchisor is able to expand its market presence without eroding its own capital, and the franchisee gains through access to established business systems, at lower risk, for their own commercial advantage.

The "commercial marriage" between franchisor and franchisee is ultimately a legal relationship, with the full obligations and responsibilities of both parties outlined in a highly detailed franchise agreement. This commercial contract varies in length and conditions from one system to the next, such that it would be almost impossible for any two franchise systems to have identical agreements.

By nature of the relationship, the franchise agreement will be imbalanced in favour of the franchisor, as the franchisor must at all times remain in control over certain standards critical to the ongoing success of the business format.

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