Franchise...what, not to mention why?

Businesses with a proven track record of profitability and those that may be easily duplicated are often franchised. According to Wikipedia, "Franchised businesses operated 767,483 establishments in the United States in 2001, counting both establishments owned by franchisees and establishments owned by franchisors." A franchise may be built around a product or a service. The Cheeseburger at the McDonalds in Jackson Hole is exactly the same as the cheeseburger you would purchase at the McDonalds in Asheville, NC. Standardization is key to the overall success of franchises nationwide.

From the standpoint of the Franchisor, a franchise is a method to increase stores nationwide or within a set market, without the risk or liability. Thus, while the Franchisee has an easy business model to follow during startup and a direct stake in the businesses, they also have greater incentive to make the franchise successful. In the case of a franchising agreement, the franchisee pays the franchisor the associated fees in regards to both purchasing rights to use the trademark and the training, marketing and mentoring services of the franchisor. These fees are often referred to as a set "management fee" paid to the franchisor.

The Franchisor in return will grant the rights to the franchise for a set period of time and a location or territory. The franchise must be thought of as a temporary lease, the franchisee never really owns the business, they are borrowing or renting the rights to operate under the proven business model, trademark and standardization. The Franchisor will also offer or suggests products, equipment, uniforms, etc. that should be purchased by the franchisee to ensure that the trademark is successfully displayed/implemented and that the standardization within the franchise is maintained. The Franchisor serves as a mentor/training leader under the set forth "management fee" and will aid the franchisee and their employees during the initial start up of the franchise, but it is the primary responsibility of the franchisee to learn to operate and run their franchise. The Franchisor holds little to no liability if the venture is unsuccessful.

Franchise vs. Company Owned
The best representation of the difference between a Franchise and a Company Owned store would be the simplistic approach, "All franchises are chains, but not all chains are franchises."

In the case of a franchise, the franchisor maintains little to no liability and places little to no resources into the creation of the store. The franchisee provides all of the capital required during the start up and operation of the business. Also the Franchisee will be extremely motivated to maintain a successfull venture primarily because it it their investment at stake if the venture fails.

On the opposite as a company owned business you will receive the total profits from the bottom line, that would otherwise go to the franchisee in regards of a franchise. A franchisor only maintains the right to the previously set royalty fee. Other benefits include the addition of assets to the balance sheet in the form of stores created, but as a negative, company funds are also tied up in each and every building created. Company owned businesses also maintain the risk of each venture, whereas the franchisee assumes the risk in the franchise agreement.

Regardless of the differences between franchising and maintaining company owned stores, the subject rarely remains divided. Franchisors often retain ownership of the best locations within their company and franchise the remaining or additional locations to franchisees nationwide. The mix is simply the best method to promote growth within their company.

Entrepreneur.com has a great article on franchising vs. building chain stores for company growth. Check it out by clicking here.