The definition of franchising

The exact definition of ‘franchising’ varies around the world. The Oxford English dictionary broadly defines franchise as the formal permission given by a company to someone who wants to sell its good or services in a particular area.

In the European business community, a more specific definition is used: A franchise is a long-term, permanent contractual cooperation between independent entrepreneurs called the franchisor and the franchisee. Throughout the duration of the contract, the franchisor leases a brand while providing the franchisee with the know-how and support in running the business.

Renowned franchising authors such as John N. Adams and K.V. Prichard Jones outline two meanings of the term ‘franchise’.  The most recognisable is called Business Format Franchising. Business Format Franchising is a contractual agreement where one party transfers its brand for use to the other party, while providing a franchise package for their entire business system. It provides the franchisee with operational support and advice in running a business, supervising its activities, whilst maintaining the separation of both parties as individual enterprises.

The lesser-known (but secretly more successful) of the two is traditionally called Product Distribution Franchising. It’s describes as a distribution agreement supplemented by the distributor's right to use the manufacturer's trademark.  As the name suggests, this method is particularly popular and successful in hard-line manufacturing industries, such as the automotive or bottling industry.

Other franchising experts such as Barbara Pokorska, author of "Lexicon of franchises," believe the most relevant definition is found within the European Code of Ethics for Franchise. In summary, the European Code of Ethics defines franchising as a system of marketing goods, services and technology, based on a close and ongoing collaboration between franchisor and franchisee(s). They are both legally and financially separate. The franchisor grants the legal right for a franchise to conduct business in strict accordance with the franchisor's concept.

After being granted the legal rights, the franchisee must pay a fee, either direct or indirect, in order to use the franchisors trade name, trade mark, service mark, know-how, business and technical methods, procedural system, other industrial, intellectual property rights, supported by continuing provision of commercial and technical assistance, within the framework and for the duration of the agreed contract.  

Important key terms

• Know-how – means a package of non-patented practical information, resulting from experience and testing by the Franchisor, which is secrete, substantial and identified.

• Secret - means that the know-how is not generally known or easily accessible; it is not limited in the narrow sense that each individual component of the know-how should be totally unknown or unobtainable outside the Franchisor's business.

• Substantial - means that the know-how is significant and useful to the buyer for the use, sale or resale of the contract goods or services.

• Identified - means that the know-how must be described in a sufficiently comprehensive manner so as to make it possible to verify that it fulfils the criteria of secrecy and substantiality.

• Franchisee - refers to the person or company granted the rights (license) to do business under the trademark and trade name by the franchisor.

• Franchisor - refers to the person or company which grants the license to a third party for the operating of a business under their brand and trademarks.

• Franchise Fee - means the initial fee paid by the franchisee to the franchisor, usually upon signing the franchise agreement, as consideration for joining the system. It is usually a one-off flat payment as opposed to a percentage royalty. It is used to offset start-up costs of the new venture, i.e., marketing and corporate expenses.

• Royalty Fee - means the percentage of gross sales paid by the franchisee to the franchisor on a regular basis. This might also be a fixed fee or upon another agree basis.