A franchise is a business model where one party, the franchisor, grants another party, the franchisee, the rights to operate under its established brand and business system. The franchisor provides the brand name, logo, and operational structure, while the franchisee typically pays an initial fee and ongoing royalties to run the business using these resources.

In everyday terms, the word “franchise” often refers to the actual business the franchisee runs, though it technically means the contract that binds the franchisor and franchisee. This arrangement, where the brand and system are shared, is what’s known as franchising.

Types of Franchising

Franchising generally falls into two types: Business Format Franchising and Traditional (Product Distribution) Franchising.

What Is a Business Format Franchise?

In Business Format Franchising, the franchisor provides a complete business model, including branding, operational systems, and training. This format is common in industries like fast food, where the franchisee operates a franchise business that is nearly identical to others in the franchise system.

What Is a Traditional or Product Distribution Franchise?

Traditional Franchising is centered around the distribution of a specific product rather than an entire business format. The franchisee is granted the rights to distribute the franchisor's product while following certain brand guidelines but with fewer operational constraints. Industries like automotive and gasoline often follow this model.