Financial Dictionary -> General Finance -> Franchise

There are many different types of business, from small sole traders to huge companies and corporations. A Franchise is a specific type of business that is more like a branch of a bigger company or one of many identical twin businesses. It works by a franchisor (the initial owner) delegating his business model, trademarks and marketing methods to a manager who then runs the business themselves, paying a fee, royalties or a percentage of profits to the initial owner. It is often described as a readymade business or an out of the box business that is ready and just needs somebody in charge.

Perhaps the most famous example of a franchise is McDonalds. Almost every town and city has an identical McDonald's restaurant. They are not all ran by old Ronald McDonald, instead they are franchised out to 'managers' that really act as owners, who are fully responsible for the business. They make all their own hirings and firings, manage their own money and have some say in promotional activities, but the main McDonald's brand is there. Franchises have different levels of support from the franchisers, but they often give training and marketing help.

Using a franchise system has strong benefits for both the franchiser and the franchisee. The initial owner may want to expand their idea but doesn't have the finance or power to get it done. Starting a franchise allows the unlimited reproduction of their business, with almost full control remaining with the initial owner, although the work is done by somebody else. The person taking on the franchise is advantaged because they get a readymade brand and proven business that they just have to run, as opposed to starting from scratch. It doesn't allow them to incorporate their own vision, but profits are usually consistent.

As well as restaurant chains other common franchises include things like vending machines, juke boxes or patented ways of doing business like a specific style of internet cafe.