Franchise, << FRAN chyz, >> is the right to sell certain products or services for a particular period at a specific location. The agreement by which a company, individual, or governmental unit grants such a right is also called a franchise. There are two main types of franchise agreements–private and public.
Private franchises.
Under a private franchise agreement, a franchisee (buyer) normally pays a fee to a franchisor (seller) to obtain the franchise. The franchisee may also pay a percentage of the firm’s sales to the franchisor. In return, the franchisor provides the franchisee with personnel training, financial assistance, and advertising. In addition, the franchisor often allows the franchisee to use a well-known trade name. Stores, restaurants, hotels, and other businesses operate under private franchise agreements. Businesses that operate in this way include Burger King, Dunkin’ (formerly Dunkin’ Donuts), Baskin-Robbins, Holiday Inn, H & R Block, and Subway.
The use of a well-known trade name can be extremely valuable to the franchisee. For example, suppose a family is traveling through an unfamiliar town and sees three possible places to stop for dinner—Chuck’s Chicken, Bill’s Burgers, and a Burger King. Because the Burger King trade name is well known, the family may have dinner there instead of at the other establishments. The people who operate franchised businesses usually seek to ensure that the quality of goods and services is consistent from one location to another.
Public franchises
are usually between public utilities and a city or other governmental unit. For example, suppose a city and an electric company have reached an agreement about electric service for the city. Under a typical agreement, the city would grant the company the right to run power lines on city land and to be the only electric company in the area. In return, the company would have to serve all public needs for this service and to have its fees approved by a governmental body such as a public service commission. Other public services that may be franchises include telephone service, garbage collection, and cable television.
