Want to understand the different between a franchisor vs franchisee?
A franchisor is the company who creates and owns a brand name, marketing strategy and business process.
The franchisee, on the other hand, is the individual to manages the operations of a business process and brand offered by the franchisor. The franchisee invests money, participates in training, and then manages a franchise business like a restaurant, gym, retail store, or service business.
I explain the relationship between franchisor and franchisee in greater detail below with a whole lot of examples.
- What Is The Difference Between A Franchisor And A Franchisee (Examples)?
- The Relationship Between A Franchisor And A Franchisee
- Who Is A Franchisee?
- What Are the Advantages of Franchises?
- What Are the Risks of Franchises?
- How Does the Franchisor Make Money?
- What Does The Franchisor Gain From Franchising?
- What Is A Franchise?
What Is The Difference Between A Franchisor And A Franchisee? (Example)
The mega-conglomerate fast-foot chain McDonald’s is a franchisor. McDonald’s has a well-oiled process of cranking out burgers, logistics, and marketing strategy that’s been perfected for decades. This process and brand that’s been developed over the years has value.
Naturally, there are many entrepreneurs who would love the opportunity to operate a McDonald’s. After all, from a profitability perspective, running a McDonald’s is as sure of a thing as you can get in business. These entrepreneurs that apply to operate and manage restaurant locations are called franchisees.
The franchisor (in this example McDonald’s) normally grants the franchisee a license to utilize the trademark and business model in exchange for a one-time fee and continuing royalties. The “franchisee” or entrepreneur is the individual or entity who owns and operates the business utilizing the franchisor’s trademark and business model system.
The Relationship Between A Franchisor And A Franchisee
In an ideal scenario, the franchisor and franchisee is a mutually beneficial relationship. The collaboration benefits both parties.
Here are the benefits to franchisors to create a franchise opportunity:
- This system enables franchisors to expand nationally or internationally.
- This system enables franchisors to open more locations since the funding for expansion is covered by the franchisee.
- Franchisors are paid monthly royalty fees that increase as more franchise operated locations go online.
- Much of the risk associated with opening a new location is transferred to the franchisor.
Here are the benefits of becoming a franchisee:
- You get to leverage the brand, product, and awareness of a concept.
- You get to jump into a proven business and start operating. You don’t need to come up with logos, marketing strategy, menu or anything else.
- You get to pick a business model that’s profitable and appealing to manage.
The relationship between the franchisor and the franchisee is crucial to the success of the business franchise model. It’s critical that both parties are aware of their responsibilities and limitations.
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As mentioned, the franchisor controls the franchise’s trademarks and operating system. The trademark and operating system are licensed to the franchisee under the terms and conditions of the franchise agreement. Both the franchisor and the franchisee must adhere to the contract’s terms.
While the parent-child metaphor is occasionally used to depict the connection between a franchisor and a franchisee, it is not the legal nor the actual commercial relationship. People who are unfamiliar with commercial connections may be perplexed by this simple illustration.
Who Is A Franchisee?
A franchisee is a self-employed small startup entrepreneur who owns and operates a franchised retail location. The franchisee acquired the right to utilize an existing business’s trademarks, affiliated brands, and other proprietary information to advertise and sell the same brand while adhering to the same guidelines.
As a franchisee, it’s your job to follow the game-plan provided by the franchisor. This is the main benefit of becoming a franchisee… so you have a business plan and don’t need to figure everything out yourself.
If you don’t like following processes or taking instruction from a corporate company than becoming a franchisee probably isn’t right for you. Trying new things like adding menu items at McDonald’s would likely be frowned upon. So if you like to experiment, try coming up with your own concept instead of investing in a franchise.
Keep in mind that one franchisee’s neglect or poor behavior might have substantial, long-term ramifications for the rest of the franchisees.
As a franchisee, a typical day entails cultivating and sustaining connections with your staff, business partners, customers, and following the business model.
What Are the Advantages of Franchises?
Franchising certainly entails several advantages to the franchisee. Some of these advantages include the following.
Being Your Own Boss. Being your own boss is one of the main advantages of running a company. You get to be your own boss and benefit from the franchise’s knowledge base when you establish a franchised firm.
A franchise allows you to be your own boss without taking the risk of starting your own company with a concept that isn’t proven.
Help With Your Business. The franchisee receives business support from the franchisor, which is one of the advantages of franchising. The franchisee may obtain practically a turnkey company operation, depending on the conditions of the franchise agreement and the structure of the organization.
They might be given the brand, the equipment, the supplies, and the marketing strategy—basically everything they need to run the business. Other franchisees may not provide everything, yet all franchises offer the franchisor’s expertise and insight.
Reduced Risk Of Failure. Franchises have a lower failure rate than sole proprietorships. When a franchisee invests in a franchise, they are joining a strong brand as well as a network that will provide them with assistance and guidance, reducing the likelihood of going out of business.
Furthermore, because franchisees have previously established their business model, you may be confident that the items or services are already in demand.
Established Brand. Brand awareness is a significant benefit that franchisees obtain when they launch a franchise. Starting a business from the ground up would need you to create your brand and client base from the ground up, which would take time.
Franchises, meanwhile, are well-established enterprises with built-in consumer bases. Consumers will already know what your business does, what you provide, and already trust you because of the brand recognition.
What Are the Risks of Franchises?
Wherever there are advantages, there will also be disadvantages. There are also certain risks when deciding to go into franchising. Here are some risks of this model.
Startup Cost. Whilst the franchise fee provides many benefits to the franchisee, it may also be expensive—especially if you’re joining a well-known and lucrative business. While this generally correlates to higher profitability, it can be difficult for a small business owner the cost to join a franchise. Some concepts like restaurants, often require $1 – $2 million dollars to open and strict net-worth requirements from a franchise.
Even if you choose a low-cost franchise, you’ll almost certainly have to put in a few thousand dollars upfront. While this may appear to be a disadvantage of franchising, it’s critical to balance the possibility with the initial expenditure and find the correct balance for your business. Also, bear in mind that there are franchise financing alternatives available to assist you in covering this initial expenditure.
Related Reading: What’s the Real Cost to Open a Dunkin’ Donuts Franchise?
Financial Indiscretion. A lack of privacy is another downside of franchising. The franchisor’s ability to manage the franchise’s complete financial environment will be stipulated in the franchise agreement. Franchisees may consider the lack of financial privacy to be a downside of having a franchise; but, if you embrace financial counsel, it may be less of a problem.
Regulating Restrictions. While a franchisee has complete autonomy over their location, they cannot make decisions without consulting the franchisor first.
The most vexing drawback for most franchisees is having to adhere to the franchise agreement’s restrictions. The franchisor has some influence over the franchisee’s decisions and the bulk of the franchise company.
The franchisor has influence over any of these areas of the business, depending on the franchise agreement:
- Hours of operation
- Business location
- Advertising and marketing
How Does the Franchisor Make Money?
Franchisors profit from successful franchisees in a nutshell. Franchisees must not benefit from their channel by collecting a high upfront charge with a huge profit margin. The purpose of the initial fee is to remunerate the franchisor for the significant cost of recruitment and training franchise owners, providing preliminary obligations to allow a franchisee to start a business, and reimbursing the high level of involvement a franchisor has in a franchisee’s business at the start of the relationship.
When a franchisor includes a significant profit component in the first price, there is a risk that the franchisor will wish to take on franchisees regardless of whether they are capable of running well, only to obtain the upfront profit part in the initial cost. In addition, franchisors should not create secret profits; every source of revenue for a franchisor must be disclosed.
What Does The Franchisor Gain From Franchising?
Being a franchisor is a major choice that should not be taken lightly. If you are a successful business owner wishing to expand, franchising your company may provide you with incredible growth. Here are a few ways franchisors turn a profit.
Franchise Fee. A franchise fee is a one-time payment made when a new franchisee signs the franchise agreement. An initial franchise fee is used to assist in recuperating the costs of establishing up the franchise as well as the costs of recruiting, training, and supporting franchisees. Your franchisee obtains the ability to use your brand name, offer your products and services, and receive help for putting their unit up and operating by paying the franchise fee.
Extra Charges. Many franchisors impose additional costs in addition to the franchise and royalty fees. You may make it a requirement for your franchisees to purchase particular things in order to run their business, whether it’s ingredients, equipment, or promotional materials. You may arrange for it to be manufactured and sold straight to your franchisees, or you can negotiate a profit share with the manufacturer.
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Add-on fees for advertising, systems administration, or technology might be another source of revenue. You should invest the money you generate from these fees not just in your corporate headquarters, but also in your franchisees.
Royalty Fees. In essence, your franchisees are paying for your intellectual property as well as the framework you created to assist them in running their business. It is usually paid monthly and is calculated as a percentage of the franchise unit’s total sales.
You will be successful if your franchisees are successful and make a lot of sales. Keep in mind that if your franchisees fail, it will have an impact on you. You have a vested stake in the franchisees’ success because of the royalties. You’d like them to succeed so that you may succeed as well.
What Is A Franchise?
When a company wishes to expand its geographical reach or market share at a minimal cost, it might franchise its product and brand name. A franchisee and a franchisor form a partnership that benefit both parties.
The initial business is the franchisor. The franchisor sells the right to utilize its name and concept in the future. The franchisee purchases the right to sell the franchisor’s goods or services using the franchisor’s existing business model and brand.
A franchise is a kind of license that allows a franchisee to offer a product or service under the franchisor’s brand name by giving them access to the franchisor’s unique business expertise, procedures, and trademarks. The franchisee normally pays the franchisor an initial start-up cost as well as annual licensing fees in return for obtaining a franchise.
In a highly competitive market like fast food, franchises are a common option for entrepreneurs to establish a business. One of the biggest benefits of buying a franchise is having access to a well-known brand. You won’t have to invest time or money to get your name and goods in front of potential buyers.