While a franchisor is the owner and administrator of a licensed business model, the franchisee operates the business and benefits from it by buying the rights to use the business model and its brand’s trademarks.
What is the relationship between the franchisor and the franchisee?
The relationship between a franchisee and a franchisor is one of a mentor and an apprentice.
The franchisor contributes to this relationship with a brand and prototype business that is licensed for use, and the franchisee pays an upfront fee and royalties in exchange for the provided knowledge and intellectual property.
The franchisor will offer the franchisee the necessary tools to facilitate the management of the franchise business. He will provide guidance, training, support, market knowledge, a proven business model, and assistance to clear the path to franchising success.
To establish the terms of the franchisor-franchisee relationship, the franchisor will provide a franchise agreement. The FA dictates the rights and obligations of both parties in the franchise.
This legal document determines the extent to which the franchisor will be involved in the franchise business and details the fees and royalties the franchisee must pay. The franchisee must adhere to the guidelines established by the franchisor for selling products and providing services. A franchisee is subject to these rules, so there is no complete freedom in decision-making.
While some franchisors only provide the business model and trademarks as part of their franchising offer, others include ongoing support, business management systems, marketing materials, and inventory software to accelerate the profitability of the franchise business.
What is a franchisor?
A franchisor is an individual or business entity that sells the rights to operate a business using its trademarks and business model.
The franchisor is usually the person that started a business and, because of the success of the initial business, he allows other people to replicate its system in exchange for a fee and agreeing to certain conditions.
What are the roles of the franchisor?
The responsibilities of a franchisor vary depending on the specific business model and the terms that are stipulated in the franchise agreement.
Some common franchisor responsibilities include:
Providing a registered trademark
The franchisor will develop a business concept, brand, plan and operational procedures and allow its licensed use. This is one of the most valuable assets franchises offer because franchisees can benefit from a recognized brand name and have access to an established customer base.
Provide a Proven Business Model
The company’s core strategy for making a profit is the foundation of the franchise business. The franchisor details information such as the products and services, processes, target audiences, prices, and anticipated expenses, so the franchisee can replicate the operations.
It’s of the utmost importance that the business model is also scalable and sustainable to ensure it is apt for franchising.
It’s easier for the franchisee to obtain profit from the business, for the franchisor will proportionate him the industry expertise, insights about their current customers, and how to attract new clients.
Collect royalties and fees
To buy a franchise, a franchisee is required to pay an upfront franchise fee, also called an initial franchise fee. This is a one-time payment used by franchisors to offset the start-up costs and other expenses.
Additionally, once the franchisee has officially entered the business venture, the franchisor will require a weekly or monthly royalty fee. This fee is typically based on a percentage of the branch’s gross sales.
Other fees that may be required are advertising funds, which are allocated to the creation and placement of advertising, and are usually required at the same time as the royalties.
Providing the FDD and franchise agreement
The franchisor is responsible for setting the terms and conditions under which the franchisee will have the right to use its brand. The franchising agreement usually includes terms such as:
- The territory where the business will have permission to operate
- Business operations and how they must be conducted
- Training programs for franchisees and their staff
- Duration of the franchise agreement
- Upfront initial franchise fees and royalties
- Usage of trademarks and intellectual property
- Renewal policies
- Exit strategies
Training and Support
It’s essential that the franchisor guides the franchisee on how to conduct the day-to-day operations and other key activities related to administration, hiring and training staff, sourcing supplies, and more. The franchisor will have to offer support for his franchisees initially, but also on an ongoing basis, and help them solve concerns regarding inventory, operations, or advertising.
Creating marketing materials
The franchisor needs to set up guidelines for the style of the imagery and formats of the marketing materials. The franchisor may provide signage and ad templates to ensure the overall image of the brand is cohesive. The franchisee may take care of the local advertising efforts, while the franchisor is responsible for the massive distribution.
Although a franchising business has more probability to succeed than a startup, not everyone is apt for buying a franchise and operating it optimally. For this reason, franchisors need to ensure candidates have business knowledge, people management skills, financial savvy, and the willingness to adhere to the franchise rules.
Offering vendor and suppliers list
To ensure the quality and consistency of the product every branch offers, the franchisor must provide a list of approved vendors they can get their supplies from. This list can also include suppliers where they can find equipment, software, and other assets that are essential for the functioning of the business.
Franchisors have access to the franchisees’ finances to monitor the performance of the business, assess its practices and provide support if needed.
What is a franchisee?
A franchisee is an individual or company that obtains the rights of using a licensed brand and selling its products in exchange for abiding by specific rules, paying an initial fee, and periodical royalties.
Franchisees are usually small business owners, and they get the opportunity to operate at an exclusive location that is away from other businesses of the same franchise.
What are the roles of a franchisee?
After making the corresponding payments and signing the franchise agreement, a franchisee will be able to operate a branch of the franchising business.
The role of a franchisee is to replicate the original business model with the objective to expand its operations at a regional or national level. The franchisee must follow the proven model and adapt some details according to his needs, but always under the limitations determined by the franchisor.
Usually, a franchisee will have the following responsibilities:
Managing the franchise location
The franchisee will independently manage the daily operations of the business, such as opening the store, supervising day-to-day activities, ordering inventory, and analyzing the financial performance of the business.
The franchisee will determine how business is conducted, based on the guidelines set by the franchisor. A branch can offer different prices, as long as they are within the established range.
The franchisee will also engage in local marketing activities that must be previously approved by the franchisor, as well as contribute to the franchisor’s national advertising campaign.
Abiding by rules and guidelines
By buying a franchise, a franchisee has access to a proven business model, which decreases the chances of failure. However, to benefit from it, franchisees must follow the rules that are assigned by the franchisor. These guidelines cover different aspects of the business, from uniforms and advertising, to protocols and software.
Upholding its reputation
A franchise business relies on the experience each of its branches provides to its clients. For this reason, a franchisee must meet the required quality standards in its services and products and ensure to keep a positive overall image of the franchise.
Find, build, and lease a location
Regularly, the franchisor will delimit a specific territory where the new franchise will be able to operate, in order to avoid competing with other businesses of the same franchise. However, it is the role of the franchisee to find a location within this area that has a high demand of the product.
Covering the costs of establishing the business
Opening a franchise requires leasing and building a location, acquiring equipment, furniture, utensils, and other assets. All the costs related to developing the business are to be covered by the franchisee.
Additionally, the franchisee is responsible for the operating expenses of the franchise business. This includes payrolls, supplies, taxes, and all the cost related to operating the franchise location.
Hiring and training employees
The franchisee is going to take care of the team that will move the business forward. A franchisee will take care of the recruitment process, review applications, put out job postings and interview candidates.
A franchisee must have a clear understanding of the procedures and operations to be able to communicate it to the team and replicate the same system.
Paying ongoing fees and royalties
A franchisee must consider the monthly payment of royalties among the fixed expenses of the business. These royalties are key for a franchising business because they make the model sustainable.
Producing financial reports
A franchisee has to regularly inform about the financial performance of the business, so the franchise owner can monitor its profitability.
Since it’s likely that the franchisor will have access to the franchisee’s financials, the latter must be transparent about the profits and losses of the business.