What Is Franchising? - Definition & Explanation

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  • 0:00 What is Franchising?
  • 0:45 Franchising Relationships
  • 2:30 Financial Agreements
  • 3:42 Lesson Summary
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Lesson Transcript
Instructor: Ryan Hultzman
In this lesson. you'll learn about franchising, a common entrepreneurial strategy in which an individual manages his or her own location of a larger company - with strings attached. After the lesson, you can test your understanding with a short quiz.

What Is Franchising?

Some entrepreneurs are ready to take an idea, build a business, find their own financing, and take the risk of starting with very little and hopefully building a successful venture. Others want the opportunity to be their own boss, but aren't excited about blazing their own trail. For these more risk-adverse entrepreneurs, franchising may be just what they are looking for.

Franchising is a business model wherein an individual operates their own location of a larger, more established company. For example, when you go to your local McDonald's, Subway, Dunkin' Donuts, or nearly any hotel in the United States, you are most likely at a franchise location.

Franchising Relationships

A franchise is an agreement between two business partners: the franchisee and the franchisor. The franchisee is the entrepreneur that is going to buy the franchise from the larger company, also known as the franchisor. When a franchisee buys a franchise, they are essentially paying the franchisor for their name, general business plan, and help in starting and operating the business.

The relationship between the franchisee and franchisor is extremely important. Obviously, the franchisee needs the support and assistance of the franchisor to succeed, and the franchisor will be paid a percentage of the franchisee's sales, so the franchisor wants to help the franchisee succeed. But, the franchisor must also protect their most valuable assets: their name and reputation.

An entrepreneur running their own business has free reign over every operational decision. They can market how they want to, sell at the price they want to, develop the products they want to, and really, make their own rules. Because a franchisor needs to maintain a consistent reputation throughout their market and among a number of different franchisees, part of buying a franchise is agreeing to a number of conditions set by the franchisor.

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