Franchise is a form of intensive cooperation between independent entrepreneurs. One party - the franchisor - licences the other party - the franchisee - a complete business concept - the franchise formula. The goal of cooperation through franchise is to benefit both parties.

The franchisor can realise faster expansion without requiring large investments. His income is made up on the one part by deliveries of goods to franchisees; secondly he receives a fee - see franchise fees - for performing services for the benefit of the franchisee. The franchisee runs considerably less risk as an independent entrepreneur when compared to a completely autonomous starter and is able to earn a sustainable living because of the franchise. Economically, the franchisee sacrifices a little of his independence when entering into cooperation in the form of franchising. As a trade-off he enjoys many benefits because of the franchise.

The exact rights and duties of the franchisor and franchisee are treated in the franchise agreement. In addition to the franchise agreement, the franchise handbook elaborates further on the operational tasks which the franchisor and franchisee take care of.

There is an efficient division of tasks in a franchise between the franchisor and franchisee. Both the franchisor as well as the franchisee focuses on those tasks which form their main strengths. For the franchisee, this consists of the practical tasks, such as sales and the day-to-day operational tasks within their own venture. For the franchisor, the focus is on marketing and the overall direction of the complete franchise organization.

Both the franchisor as well as the franchisee have the goal of realizing the optimum result. Other goals are derived from this such as growth, continuity and efficiency.

The initiator is the franchisor. He developed the successful franchise formula, which he licences to franchisees for a franchise fee. The franchisee can in turn use the common name of the franchise formula, the trademarks and the brand names of the franchise.

In a successful franchise, the elements of the marketing mix are optimally tuned into each other. Among other things, this comprises the range of products and services, pricing, the level of service, the interior and exterior of the establishments, communications towards the public and so on.

Franchise as a system of distribution proves to be very successful. The phenomenon franchising is still growing quickly in the Netherlands and for good reason:

• The franchisees can focus on that which they excel at, the practical and commercial aspects of their venture.
• The franchisor supports the franchisee in many areas which the franchisee does not have the time or money to attend to, or might not even be very much interested in.

Franchising is characterised by the following aspects:

Division of tasks within a franchise

The franchise contract states the division of tasks between the franchisor and franchisee as well as the rights and duties of the franchisor and franchisee. This division of tasks is based on every party doing the tasks in which they can excel: The franchisor creates the conditions which enable the franchisee to work efficiently.

Image of franchise formulas

Only products, services or complete commercial formulas which set themselves apart from the market in a positive way are eligible for franchising.

Know-how and support for franchisees

The franchisee hires a licence to use the name, trademarks and brand names of the franchise. Along with this, the franchisor provides the knowledge and support which is necessary to reach an optimum result.

Selection and training at franchise formulas

Expansion is desirable to strenthen the franchise network. This is achieved through recruitment campaigns followed by careful selection of potential candidates. After selection, the potential franchisee usually receives training to make and keep the franchisee used to the business of the franchisor and its processes and procedures. After the franchisee has started with his or her venture, the central franchise organisation usually keeps on supporting the franchisee through a franchise-education or training.

Monitoring of franchisees

The recognisability of the franchise harbours its true strength. It is therefore essential for the franchisor to monitor whether the franchisees implement the franchise formula the way the franchisor has tested it during the development of the franchise concept. This is a continuous process, which is usually the responsibility of a franchise formula manager or franchise formula coach.

First generation franchising

This form of franchise is product-centered and finds its application primarily in a dealer system. For example in garages and petrol stations.

Trademark franchising

Trademark franching also centers around the product. This form is most commonly used in industry and is comparable to products which are produced through licencing. For example 7-Up and Coca Cola.

Second generation franchising

Second generation franchising does not centre around the product but rather around a total business concept. All aspects of running a business, such as marketing, sales, administration, automation and so on are handled integrally. Within second generation franchise a distinction is made between two forms:

• Modern method / Hard franchising
  Hard franchising is characterized by clear agreements on almost every aspect of the business (Total Business Concept)
• Soft franchising
  The manufacturer, wholesaler or insurer starts a franchise with a group of independent entrepreneurs. The agreements are rather free and do not entail many obligations..

Continue reading on the advantages and disadvantages of franchising.