What is a Franchise?

by Investing School on June 24, 2010

Franchising is something that has become increasingly popular in the United States. It is the practice of taking on another person’s business model as an independent operator. The franchisor gives the franchisee the right to sell its products, use its business techniques and has the free use of trademarks and logos. This is all available for a fee upfront and also a percentage of the gross monthly sales and a royalty fee. The business that the franchisee licenses to use is called the franchise. An agreement between the franchisor and franchisee can last from five to thirty years depending on the terms of the contract. When someone terminates a contract before the term is up there are usually very serious consequences and penalties.

The business of franchising has been in practice for many centuries. In fact, in the 1850’s Isaac Singer, who made significant improvements to the sewing machine, wanted to find a way to mass distribute his machines. It resulted in one of the first attempts at franchising in the United States. However, it was not until the 1930’s that it came into common practice in the United States. It was becoming more popular with the prominence of vehicles and widespread electricity. Once the 1950’s hit and the Interstate Highway system was built, this was when franchising took off. Fast food chains began to pop up all over the country. According to the International Franchise Association, nearly 4% of all businesses currently operating in the United States are franchises.

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