A business format franchise is a franchising arrangement where the franchisor provides the franchisee with an established business, including name and trademark, for the franchisee to run independently. Fast food restaurants such as McDonald’s and Burger King are examples of such franchises.
In a business format franchise, each franchised outlet or business should look and act the same. It should provide an identical product or service of identical quality. While each is independently owned and operated, this should make no difference to what the customer receives e.g. McDonalds’ hamburgers should taste the same wherever you buy them. For achieving this the franchisee is also trained by the franchisor in the business model and format including selling, marketing, personnel procedures, inventory, and more.
Some of the characteristics of a business format franchise are given below:
1. The ownership by the franchisor of a name and trade mark, an idea, a secret process, or a piece of equipment, and the goodwill and know-how that is associated with it.
2. The grant of a licence (the franchise) by the franchisor to another person (the franchisee) permitting the franchisee to exploit this.
3. The inclusion in the franchise agreement (and elsewhere such as a manual) of regulations and controls relating to the way the franchisee exploits its rights.
4. Payment by the franchisee to the franchisor for the right to operate the franchise. This can take various forms, such as a royalty on turnover, or a surcharge for the product supplied by the franchise.
5. Provision of trading and support by the franchisor to the franchisee to enable the franchisee to carry on its business according to the franchisor’s system.