"Franchising can be defined as a system based on a close and ongoing collaboration whereby a company, the franchisor, gets into partnership with one or several companies, the franchisee(s). Its prime aim is to develop a franchise concept designed in the first place by the franchisor." (Internet, 1)

In order to better understand the concept of franchising I will first explain several commonly used terms in this concept.
Ø Franchise is a legal agreement that allows one organization with a product, idea, name or trademark to transmit some rights and information about a business to an independent business owner, which in return pays a fee and royalties to the owner.
Ø Franchisor is a company that owns a product, service, trademark or business format and provides this to a business owner in return for a fee. Franchisor often is the one that makes the conditions under which a business owner operates, however he doesn’t control the business.
Ø Franchisee is a business owner who purchases a franchise from franchisor and operates a business using the name, product, business format and other items provided by the franchisor.
Ø Franchise fee is a one time paid fee by the franchisee to the franchisor, and is paid for rights to use trademark, management assistance and some other services.
Ø Royalty fee is a fee continuously paid by the franchisee to the franchisor- usually paid as a percent of gross revenue earned.
Ø Franchise trade rule is a law by the Federal Trade Commission that places several legal requirements on the franchisors
Ø Trademark is a distinctive name or/and symbol used to distinguish a particular product or service from all the others.

In practice we have four types of franchising- Product Franchise, Manufacturing Franchises, Business Opportunity Ventures, and Business Format Franchising. In the case of Product Franchise, manufacturers use the product franchise to govern how a retailer distributes their product. The manufacturer grants an owner of the store the authority to distribute goods by the manufacturer and he is allowed to use the name and trademark of the manufacturer. In return the storeowner has to pay a fee or purchase some inventory of stock in return for the rights given. Manufacturing Franchises provide an organization with the right to manufacture a product and to sell it using the name and the trademark provided by franchisor. This type of franchising is usually seen in food and beverages industry.

Business Opportunity Venture usually requires that a business owner purchases and distributes the products for one specific company, which must provide him with the customers. In return business owner has to pay a fee or some other type of compensation. Finally, the Business Format Franchising, the most popular type, is the approach where a company provides a business owner with a proven method for operating a business using the name and the trademark. The company has to provide assistance to the owner of the business at the beginning, and the business owner has to pay a fee in return.

Usually people are asking what makes one company to offer a franchise, so it is important to understand the franchisor’s perspective. First of all, franchising is an opportunity for more rapid expansion. Many companies may experience of lack of capital and skilled employees, so the franchisee can offer all of that. At the beginning the franchisor assists a franchisee with obtaining financing for a new business, however the franchisee is liable for repayment of the funds. Franchisor is selecting its franchisees by their experience and skills, and in that way he/she is minimizing its risks. Another reason for franchising is higher motivation. This is because when the company franchises its operations it acquires a group of new, motivated managers, which are more accountable for actions since as an owners they are completely responsible for business outcomes. Further more capital is another reason for getting involved in franchising. The company, by franchising, is raising the money without selling an interest in the business, and the franchisor is using the franchisee money for further business expansion. This way the company is avoiding the risks, which may come out from issuing stock and taking the loans.

The company’s image and name are at certain risk when sold to other individual. So, a franchisor is very particular about the standards that franchisees are obliged