Franchising, product distribution and licensing are three modes of business expansion that are common found through out the world. Each mode has its advantages and disadvantages and suits particular types of businesses and environments.
In Franchising, a second party called the franchisee is given the trademark rights and right to operate in any given area over a given period of time. The franchisee is trained by the franchisor and further receive instructions to conduct the business in the most favourable way.
In product and supply distribution chains, the distributors sign a contract with the producers and buy in a bulk.
The same products are further sold and supplied by the distributors to the retail owners. In production distribution agreements, the distributor is not bound to conduct business with just any single producer.
The distributor acts just an intermediary in the demand and supply chain. In the third and licensing business mode the established brand provide licenses to the independent firms. These firms enjoy the benefits of the trademarks, but again there is no extensive training or support received from the original holder of the trademarks.
Franchising is the most reliable as the commercial interest of franchisee and franchisor coincides. The franchisee has to keep the unit operational and the franchisor has to see if any changes in the business model or strategy need to be incorporated. This makes the franchisor to devote more time and resources in the research and development of the business and the franchisee to devote more time in management and administration of the business unit.
Also, the help and assistance in case of business franchising varies. But in any case, the franchisor is bound by legal obligations to provide the assistance and support. In product distribution, it is a one-time contract with no follow up support or assistance.
Licensing also happens to be discouraging to the beginner. The degree to which a franchisor assists the franchisee and provides technical know how is not the same as in licensing. Licensing agencies just assess and evaluate the performance of the licensees.
It is because of the aforementioned reasons that entrepreneurs prefer to venture in franchising rather than product distribution or licensing.