Final answer:
Franchising is the business practice where one party, known as the franchisor, grants another party, the franchisee, the right to use its brand name, trademarks, and proprietary business knowledge in return for royalties. This allows the franchisee to operate under a well-established brand and business model, benefiting from a recognized market presence and support from the franchisor.
Step-by-step explanation:
The arrangement where one party offers another the right to use its brand name and all related trademarks, as well as its business know-how in exchange for royalties is known as franchising. A key aspect of franchising is the sharing of the brand's identity, including its trademarks, which are words, names, symbols, or devices used in marketing that the consumer recognizes as associated with a particular company's products or services. Alongside this, the franchisee also receives the business model, which can include trade secrets, like secret recipes or customer service techniques.
For example, a franchisee of a fast-food chain is given the right to operate a restaurant using the chain's trademarked name and proprietary methods, which could include a popular but easily copied restaurant recipe or an effective customer interfacing technique. The franchise develops a well-respected brand name over time, often associated with specific intellectual property assets, such as a unique recipe or branding strategy, that are valuable in attracting customers. In return for these benefits, the franchisee pays royalties to the franchisor. This arrangement allows for the diffusion of a successful business model and brand identity, and offers an incentive for the franchisor to support the franchisee in order to maintain the quality and reputation of the brand.