A business may also grow through franchising. There are two distinct types of franchises – package franchises and product franchises. A package franchise exists when a franchisor licenses a franchisee to do business under a pre-packaged business format established by the franchisor and identified with the franchisor’s trademark. The franchisor usually provides the franchisee with initial training and assistance in the establishment of the franchised business as well as some ongoing assistance. The franchisor usually exerts significant control over the method in which the franchisee operates its business. McDonalds

® and Burger King® are good examples of package franchises. Product franchises, on the other hand, exist where the franchisor has already produced goods and the franchisee merely provides an outlet for the goods. The franchisor will usually exercise significant control over the franchisee’s operation to ensure proper marketing of the product. Gas stations and car dealerships are examples of product franchises.

 

The primary advantages of a franchise relationship include:

(a) lower capital expense than company-owned outlets;

(b) most of the risk is absorbed by the franchisee;

(c) the franchisee becomes the responsible employer;

(d) the franchisee is responsible for state and local taxes and business licenses; and

(e) the franchisee will generally have a greater interest in the success of the business than a manager of a company-owned outlet.

Since franchisors generally exert a significant degree of control on the franchisee’s method of operation, there is more control in a franchise relationship than in a distributorship/dealership or license. Furthermore, since the franchisee operates its business under the franchisor’s trademark, most of the goodwill of the franchisee’s business inures to the benefit of the franchisor.

 

The primary disadvantages of a franchise relationship are the additional regulatory (and legal) expense, and the additional level of administration to manage the franchise process (including sales, training, operations, etc.).