If you’re considering franchising your business or purchasing a franchise, you’re probably wondering who’s in charge of what. In this article, we’re going to go over some of the differences between a franchisor and franchisee. After reading, we’ll hope you’ll be more informed and know if franchising is right for you.
What a Franchisor Does
The franchisor typically creates the first / prototype business. They are the ones who are selling their business to the franchisee.
Establishes a proof of concept with the first business
Before an entrepreneur should start franchising their company, they need to lead their first business to a successful model ready to be duplicated. Otherwise, they are just selling a concept – not a proven business model. The founder of a business assumes all the initial risk when they start the business. By the time a business is franchised, the owner has made a number of moves in the business, some of which may or may not have been the right strategy for his business and as a result of some of those moves he may have lost both money and time. Once the model is fully defined and tested into a replicable platform, then franchising is a great way to expand and make money.
Licenses out the franchise
What exactly a franchisor is selling to their franchisee depends on the specifics of their arrangement. Still, every franchisor-franchisee relationship is rooted in the licensing of one’s company’s intellectual property (the franchisor) to a new entity (the franchisee.) The new entity purchases the right to use the original company’s name, branding, products and trade secrets for a determined amount of time.
Provides support to the franchisee
A good franchisor offers ongoing assistance to their franchisees. It starts with providing training to the owner and key management employees of the new franchise. In certain industries, part of a franchisor’s role is to provide raw materials or distribution support. Oftentimes, franchisors provide the franchisee with marketing materials. It’s advantageous for the franchisor to produce these elements. Continuity in marketing can help create a smooth, uniform customer experience across all channels.
Collects payment from the franchisee
When a franchisor has sold a franchise of their company, they collect an initial fee referred to as the Initial Franchise Fee from the new franchisee. They also continue to make money from the new franchisee by collecting a percentage of their gross sales on a weekly or monthly basis. This is referred to as on-going royalty. These royalties can help pay for the franchisor’s ongoing support costs to the franchisee. They are also intended to compensate the franchisor for licensing his original concept.
What a Franchisee Does
Franchisee purchases the right to run an extension of the original business – aka the franchise.
Purchases right to franchise
Before a franchisee can open their own branch of an existing company, they have to purchase franchising rights. Once a franchise is purchased by a franchisee from a franchisor, franchisee must first receive a formal training, normally conducted at franchisor’s headquarters, about the operation of the business. Franchisee then has to find an adequate location for their business. The proposed location must be approved by franchisor before the build-out process can begin. Franchisee must build the location exactly per franchisor’s guidelines and standards. Once the location is approved for grand opening, then franchisee begins to hire employees, order inventory and get ready to open doors to public.
Operates day-to-day operations independently of the franchisor
After getting the rights to a franchise, the franchisee is in charge of running their own business. While they may receive training, advice and ongoing support from the franchisor, it is the franchisees job to operate the business on a day to day basis. Franchisee hires and handles their own employees. They determine how business is conducted, based on guidelines set by franchisor in a document referred to as the franchise operations manual. Franchisor sets pricing limits for products/services offered at all stores. Franchisee can offer prices that are different from other locations, but the prices offered must be within the price range set by franchisor. Following franchisor’s guidelines, franchisee must advertise the business and its services locally and must also contribute to franchisor’s national advertising campaign. After paying the business’s ordinary expenses as well as the royalty and the national advertising fee, franchisee keeps the rest of the money as their profit for their operation.
Gets support and materials from the franchisor enterprise
Both franchisor and franchisee have a vested interest in making franchisee’s business as profitable as possible. That’s why a good franchisor provides the best support and the most comprehensive training to their franchisees. Franchisor has already done the legwork and figured out how to make the business perform. By passing these lessons learned to franchisees through the initial and on-going franchise training, franchisor can ensure prosperity for their franchises. Franchisees benefit from their franchisor’s support in many ways and this may include sharing recipes and trade secrets, providing access to the company’s approved distribution channels and much more. A successful franchise can be the most important asset a company has.
Gains the benefit of an established brand name or product without the initial risk
Every investment comes with a degree of risk, but buying into a franchise system is by far a “safer” bet. Franchisees can be banking on the fact that the original business has a successful model and is scalable. When you purchase the rights to a franchise, you’re paying for the knowledge of the business owner and the mistakes he made, so that you don’t have to make them. Rather than testing the market and making costly mistakes along the way, franchisee pays for the proof of concept justified by the model set by the working business.
Franchisees and Franchisors Work Together & Make Money
Whatever side of the arrangement you fall on, both franchisor and franchisee are dependent on each other. By working as a team, both parties can make the most of their relationship. This means delivering outstanding products, having a uniform brand presence, and making money across all locations.
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Are you familiar with the risks and benefits associated with franchising? Check our guide that will help you decide if buying a franchise is your best option