For many people undertaking research into starting their own business, they will come across terms relating to franchising. What is a franchisor vs franchisee, for example?
What is a franchise business?
Franchising may be a new concept to some but it is a model of business that allows people to run their own business and to be entrepreneurial using the framework & support that a franchise has put in place for them. The franchisor develops, tests & refines the business model & the franchisee buys the right to operate that business model in a particular location or set of circumstances.
Bearing in mind that franchising may be a new concept to some, we have defined a number of the terms that you will come across in order to give you an understanding of how the business works.
To learn even more you can read our How does a franchise business work article.
What is a franchisor?
The definition of a franchisor is a company that grants a license to an individual or group known as a franchisee, allowing them to conduct business using the franchisor’s trademark, products, and business model. The franchisor provides the franchisee with the resources, training, and support needed to operate the business. Well-known franchisors include McDonald’s & Subway.
What is the role of a franchisor?
The franchisor provides a business system that others can operate. The aim of a franchise is to provide a profitable model that others can follow. The franchisor typically provides a trademark & a brand that will have a reputation that enables a franchisee to ‘hit the ground running’ with a business as opposed to starting from scratch with no reputation or means of operation. In addition, franchises will provide training & support for franchisees which is particularly valuable in an environment where the business environment or compliance changes over time.
Training & support can be of particular value to new franchise owners who will be trying to accomplish a lot of things all at once in order to get their business off the ground & may come across a number of situations that they don’t know how to address.
A franchisor will often provide additional support to the franchisee in the form of a business development manager who will work to grow the franchisee’s business & through enabling franchisees to work & network together in order to refine & benchmark their own business over time.
The franchisor builds, cultivates & protects the reputation of its brand which helps all franchisees (a rising tide that lifts all ships).
The franchisor sells the license to operate a business to the franchisee in return for a franchise fee & a percentage of the franchisee’s sales.
What is a franchisee?
The definition of a franchisee is an individual or company that purchases the rights to open and operate a business under the terms of a franchise agreement. The franchisee pays the franchisor a one-time initial fee and ongoing royalties for the right to use the franchisor’s trademarks and business system. The franchisee will gain the use of:
- The brand name
- Company trademarks
- The franchisor’s business model
- Any goods and/or services provided by the business
- The franchisor’s industry experience
- The franchisor’s proprietary market knowledge
- The franchisor’s economies of scale & buying power
- Training materials
- Marketing materials
- Opportunities arising from the franchise network
- The franchisor’s support & business development team
What is the role of a franchisee?
The franchisee’s main role is to get on with operating their business. If business is Formula One, the franchisor is the team & the franchisee is the driver: they have to follow the rules of the race but they’re the ones with the responsibility & the reward of driving the car. The pit crew will support them & do their best to ensure their success in the race but the franchisee is the one who will be driving the business.
The franchisee will take on a franchise in a given territory & will use the business’s brand reputation & leverage the franchise’s experience to build the business in that area. The franchisee will pay an initial franchise fee as well as ongoing royalties which will change in proportion to their earnings.
What are the responsibilities of a franchisor?
The responsibilities of a franchisor towards a franchisee (and of a franchisee to a franchisor) will be set out in a franchise agreement.
The responsibilities of a franchisor are:
- Provide the franchisee with training and operational support
- Maintain a consistent brand identity and quality standards
- Provide access to their proprietary & trademarked products, services & technology
- Monitor and enforce compliance with the franchise agreement
- Supply the franchisee with marketing and promotional materials
- Assist the franchisee in finding a suitable location for the business
- Provide access to financing options
- Establish policies and procedures for dealing with customer complaints
- Develop and maintain a strong relationship with each franchisee
- Act as a source of industry information, trends, and best practices
These responsibilities can help to show the benefits of having a franchisor: they provide a wide range of support & expertise to franchisees that enhance the business of the franchisee & simplify what the franchisee needs to focus on.
What are the responsibilities of a franchisee?
The responsibilities of a franchisee will be set out in their franchise agreement with the franchisor & will vary from one franchisor to another but will fall broadly into a number of categories.
The responsibilities of a franchisee are:
- Follow the franchisor’s system of operations and adhere to all of the franchisor’s rules and regulations.
- Make a commitment to maintain the high standards established by the franchisor
- Operate the business in accordance with all applicable laws, regulations and ordinances
- Establish and maintain the necessary business licenses and permits
- Provide a high level of customer service, build & maintain customer loyalty
- Use the franchisor’s preferred suppliers
- Maintain records of all financial transactions
- Make all required royalty payments to the franchisor
- Attend all mandatory training sessions and meetings
- Promote the brand and use the franchisor’s advertising and marketing materials
Franchisees typically see these responsibilities as sensible rather than onerous. Franchisees find that a franchise can liberate them rather than constraining them: They know what they have to do & will be supported with a number of things that they don’t want to do (compliance etc) & they can just get on with being as good as they can at what they do.
What are the advantages of being a franchisee?
There are a number of advantages of being a franchisee. These include:
- Brand recognition: Franchisees benefit from the brand recognition and customer loyalty associated with the franchisor’s name and logo. The first piece of business that one of our franchisees wrote was a deal with a housing developer to sell hundreds of new build properties that came because the developer had confidence in the brand & the franchisee had the support of the franchisor & its support team
- Training and support: Franchisors provide franchisees with training and support to help them succeed. This includes assistance with marketing, operations, and customer service. Training & support can be particularly valuable when a franchisee is starting out as this is when they are most likely to make mistakes & when most businesses fail
- The feeling of belonging: Many franchisees refer to how they feel part of a family that supports them when discussing why they chose to become a franchisee. It can be lonely at the top &, by having access to a support team as well as a network of other franchisees that have a wide range of experience, franchisees are more likely to make better decisions
- Increased buying power: Franchises often have access to better prices on supplies and services due to the collective buying power of their franchisor
- A proven business model: The franchisor has already developed and tested a successful business model. This means that the franchisee can leverage the franchisor’s experience to help them succeed and avoid common mistakes
- Greater access to finance: franchisors will be able to provide franchisees with access to finance that they might otherwise be unable to get. Franchisors will be developing relationships with banks & may have arranged for finance for the purchase or setup of many hundreds of businesses. Banks will value this relationship & will typically look at franchisees ambitions as being less risky than those of people looking to do the same by themselves
- Support with growth: franchisors provide business development support to franchisees & get excited when they look to grow their business. Franchisors can provide financial support & significant experience in acquiring other businesses in order to support the growth of a franchisee. The Belvoir Franchise Group have experience in analysing & purchasing hundreds of property businesses & making them part of a successful property brand. Learn how to have a successfull property franchise.
- A saleable business & support to exit: ‘Begin with the end in mind’ is a business adage meaning that, when you are starting a business, you want to ensure you have planned how you would like it to end up so that you are not stuck with it. Franchise businesses, because they are built to be sold to many people, are often of greater interest to buyers because they are easy to understand, compliant & easy to transfer. The franchisor will be looking to recruit new franchisees & will often have a number of franchise businesses for sale (or resale). The Belvoir Franchise Group has a number of resale opportunities on the market as well as a regular flow of sales coming to the market or discreet sales that are sold privately
What are the disadvantages of being a franchisee?
The disadvantages of being a franchisee are sometimes a matter of personal preference. There are costs associated with being a franchisee & there are restrictions placed on what a franchisee can do with their business. The costs associated with being a franchisee are largely levied to help the overall business and they will improve the brand, size & reputation of the business overall, benefiting the franchisee. Likewise, restrictions on what a franchisee can do with their brand will only be there to ensure that the brand is not damaged by any one franchisee. The same restrictions put on one franchisee are put on all and it means that all of the people operating the business will be working to enhance the reputation of the business. Where a business has lots of franchisees, this can often give a new franchisee comfort, knowing that everyone works within the same mutually beneficial framework.
Often the franchisee will be given the right to operate in a particular territory. This restriction prevents the franchisee from moving into different territories without purchasing the rights but it also provides a system of rules that mean all franchisees working for the business are playing fairly with each other & are more likely to work together with each other.
Another potential disadvantage of being a franchisee is that you are required to make a significant initial investment in order to start a business. In the case of the Belvoir Group, for the majority of the brands we operate, you will be required to pay a franchise fee & to purchase a ‘hot start’ business (i.e. a business that is already running). This can be seen as a disadvantage but the chances of success from running a franchise are much greater & of operating a business that is already running & profitable are higher still: you are far more likely to succeed by buying into a running business as part of a franchise than by starting your own business.
Hopefully now, you know a bit more about the franchisor vs franchisee business & arrangements.
If you’d like some help in discovering whether a franchise business could be for you, we would be happy to have a discussion with you. Please book a chat with us. We’ll happily sense-check your plans or help you to see what you might need in order to get started in business & to help you avoid any potential pitfalls. Whether you decide franchising is right for you or not, get in touch via our live chat or by booking a discovery meeting & we’ll be happy to help.