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When people think of the concept of franchising, they often think of franchise successes such as McDonald's or Burger King. Many people think that these fast food giants originated the concept of franchising, but this is not entirely true. The first known franchise started when Isaac Singer invented the sewing machine in 1858. After the success he had with his invention he wanted to distribute it outside his own territory. He also wanted a way to provide training to his customers so that they could properly use the machine. As a result of this, he started selling licenses to interested entrepreneurs in various parts of the country. This can be considered the predecessor the modern franchise agreement.
What Defines Franchising?
The International Franchise Association (IFA) defines franchising as a license or agreement between two parties who are legally independent. This license allows a single person or several people (the franchisees) the complete rights to market a service or product using the trade name or trademark of another business entity (the franchisor). Licensees are given the right to market services or products using the franchisors operating methods. Because of these rights, the franchisee incurs the obligation of paying fees to the franchisor. Franchisors are in turn obligated to provide rights as well as support to their franchise holders.
There are Two Types of Franchise Models
A supplier-dealer relationship that allows the franchisee to distribute or sell the franchiser's products is known as a product distribution franchise. Product-distribution franchisees typically run their own business independent of the franchisor but have the rights to sell licensed products through their own business. Examples of this include gas stations or car repair shops that sell and distribute products, such as Goodyear Tires. The second type of franchise is known as a business format franchises. Holding this type of franchise license obligates the licensee to run their business according to a predetermined business model provided by the franchisor. The franchisor provides training, computer systems, operations manuals, marketing plans as well as personal assistance to the franchisee. Most franchise models are business format franchises.