A franchise is an agreement or license between two parties which gives a person or a number of people (the franchisee/s) the rights to market a service or product using the trademark of another business (the franchisor).

The franchisee has the rights to market the service or product using the operating methods developed by the franchisor. The franchisee has the obligation to pay the franchisor certain fees and royalties in exchange for these rights. The franchisor has the obligation to provide these rights and generally support the franchisee. In this sense, franchising is not a business or an industry, but a method used by businesses for the marketing and distribution of their products or services. Both franchisor and franchisee have a strong vested interest in the success of the brand and keeping their customers happy.

Typically there are two types of franchise methods. There is business format franchising and product and trade name franchising.

Business Format Franchising

Business format franchising offers a variety of services to the franchisees. They provide the franchisee use of trademarks and logos, as well as a complete system of doing business. They will assist the franchisee with site selection, interior layout and design, hiring and training, advertising and marketing, product supply and more. The franchisee pays an up front franchise fee and agrees to pay continuing royalties to the franchiser that help the franchiser provide research, development and support for the entire system.

There are many examples of business format franchising, including fast food restaurants, automotive services, estate agents, convenience stores, recruitment agencies, hairdressers etc.

The type involves three characteristics:

1) The franchisee sells goods or services which meet the franchisor's quality standards (in cases where the franchisee operates under the franchisor's trade mark, service mark, trade name, advertising or other commercial symbol designating the franchisor or which are identified by the franchisor's mark.

2) The franchisor exercises significant assistance in, the franchisee's method of operation; and

3) The franchisee is required to make a payment to the franchisor or a person affiliated with the franchisor at any time before to within six months after the business opens.

Product Trade Name Franchising

This type of franchising does not include royalty fees. The franchiser provides trademarks and logos, national advertising campaigns, but most importantly, product.

This type, also offers three characteristics:

1) The franchisee sells goods or services which are supplied by the franchisor or a person affiliated with the franchisor;

2) The franchisor assists the franchisee in any way with respect to securing accounts for the franchisee, or securing locations or sites for vending machines or rack displays, or providing the services of a person able to do either; and

3) The franchisee is required to make a payment to the franchisor or a person affiliated with the franchisor at any time before or within six months after the business opens.