Under a franchise agreement, a franchisee is allowed to operate a business using much of the intellectual property held by the franchisor. There can be significant benefits to doing this, such as the name recognition provided by using an established product or brand to start a new franchise location.
However, there are different types of franchises, and they can operate in slightly different ways. Below are three examples.
A manufacturing franchise
In a manufacturing arrangement, the franchisor has the right to produce a certain type of product, but they license this right, along with their trademark, to the franchisee. Pharmaceutical companies are often involved in this type of arrangement.
A product franchise
In other situations, a product or trade name is sold, and the franchisee essentially acts as a distributor. An example of this would be an automobile manufacturer. Every dealership is a franchise location that purchases vehicles from the parent company and then resells them to customers.
A business format franchise
One of the most common types of franchise is the business format franchise, where a business model has already been developed by the franchisor. They sell the right to use intellectual property like logos and signage. They may also provide the franchisee with specific products to sell. For example, a fast-food restaurant may require certain ingredients to be used and specific menu items to be sold at every location.
In all of these situations, it is important for both the franchisor and the franchisee to understand the legal agreements they are signing, along with the rights and obligations they have under the arrangement.