Financing Through Franchising

April 13, 2006

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"Franchising" is the transfer of the right to sell a trademarked product or service through a system prescribed by a "franchisor," who owns the trademark. Franchising has been one of the fastest growing areas of new business development during the last 15 years and there are currently over half a million franchise businesses in the U.S. While traditional franchise businesses such as gasoline stations, auto dealers, and soft drink bottlers continue to grow, the most rapidly expanding industries for franchises are service businesses involving recreation and leisure activity and business services.

Franchise arrangements are usually either: (1) product and trade name franchises or (2) business format franchises. The former involves product distribution arrangements within a specified geographic territory. For example, a gas station can be a product and trade name franchise. A business format franchise includes not only a product and trade name, but also operating procedures such as facility design, accounting and bookkeeping procedures, employee relations, quality assurance standards, and the overall image and appearance of the business. For instance, restaurants and convenience stores are often business format franchises.

For the franchisee, franchising is a way to reduce the risks of a new business by buying into an established product or concept.
For the franchisor, franchising is a way to expand your business more quickly, by sharing some of the costs, risks, and rewards with franchisees.