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What is franchising?

The term franchising can describe some very different business arrangements. It is important to understand exactly what you're being offered.

Business format franchise

This is the most common form of franchising. A true business format franchise occurs when the owner of a business (the franchisor) grants a licence to another person or business (the franchisee) to use its business idea - often in a specific geographical area.

The franchisee sells the franchisor's product or services, trades under the franchisor's trade mark or trade name and benefits from the franchisor's help and support.

In return, the franchisee usually pays an initial fee to the franchisor and then a percentage royalty on sales.

The franchisee owns the outlet it runs. But the franchisor keeps control over how products are marketed and sold and how their business idea is used.

Well-known businesses that offer franchises of this kind include Prontaprint, Dyno-Rod, Burger King and Your Move.

Other types of sales

Different types of sales relationships are also sometimes referred to as franchises. For example:

  • Distributorship and dealership - you sell the product but don't usually trade under the franchise name. You have more freedom over how you run the business.
  • Agency - you sell goods or services on behalf of the supplier.
  • Licensee - you have a licence giving you the right to make and sell the licensor's product. There are usually no extra restrictions on how you run your business.

Multi-level marketing

Some businesses offer franchises that are really multi-level marketing. Self-employed distributors sell goods on a manufacturer's behalf. You get commission on any sales you make, and also on sales made by other agents you recruit.

Be careful, as some multi-level marketing schemes may be dishonest or illegal.