For sure, you know giant food chains such as McDonald’s or Popeyes, multimillionaire franchise restaurants that have expanded throughout the world. These companies are owned by franchisors, who allow third parties the use of their business model and trademarks in exchange for the payment of fees and ongoing royalties.
In this article, we will discuss what are the roles and responsibilities of a franchisor, their relationship with the franchisee, the advantages of this business model, and everything you need to know about being a franchisor.
What is a franchisor?
By definition, a franchisor is the person or company that sells the right to use its trademark, products, and business model to a third party that will open new locations and operate on the franchisor’s behalf.
The franchisor is the original owner of the company who gives access to their business model and trademarks to an independent operator, called a franchisee.
While a franchisor’s role is to recruit, train, and provide support to the franchisee, the latter will typically pay an initial fee and ongoing royalties to be able to set up their location and manage the branch’s day-to-day operations.
See the difference between franchisors and franchisees
What does a franchisor do?
The roles and responsibilities of a franchisor can be summarized as creating and preparing a replicable business model, recruiting, training and supporting franchisees, and collecting fees and royalties.
Each franchise model is structured differently, for the franchisor’s duties vary. The exact responsibilities and the extent to which the owner of the company will be involved in the franchisee´s operations are defined in the franchise agreement, which establishes the contractual relationship between both parties.
Providing a registered trademark and business model
The franchisor’s primary responsibility is to create and maintain a solid brand and concept that is successful and attractive to investors.
Furthermore, franchisors need to provide a business model that is easily replicable and to which franchisees can comply. The original owner is responsible for clearly defining the products and services, processes, branding, marketing materials, and other elements that ensure there is a consistent image and quality along the branches.
A franchisor must register their franchise and take care of the required legal procedures so franchisees have access to their trademark without jeopardizing the company’s intellectual assets. A franchisor must also prepare a Franchise Disclosure Agreement, that must be provided to possible franchisees before they decide to enter the system.
Franchisors will have to recruit franchisees to continue expanding their brand and carefully verify whether the potential independent operators are a good fit for their business model. The franchisor will have to analyze the interested business owner in search of the business experience, financial stability, and skills that adapt to their franchise.
Support and training are one of the essential elements a franchisor has to provide to the franchisee. Support includes initial training on how to set up the location and carry out the day-to-day procedures to maintain the business. A franchisor will devise training programs and operating manuals, and provide ongoing support for the small business owners.
The territory in which a franchisee will operate is key to complying with the business model and marketing strategies of the franchise. The franchisor will decide the territorial frame to set the new branch in, to ensure it does not compete against other locations.
Collect royalties and fees
At least, entering a franchise involves paying an initial fee and ongoing royalties. The upfront fee allows the franchisee to have access to the trademark and business model, and the royalties are usually structured as monthly installments that ask for a percentage of the sales. Sometimes franchisors will ask for additional fees to sustain marketing and advertising costs, as well as training programs and support.
How to become a franchisor
If you decide to expand your operations and franchise your business, you should first analyze your options with a franchise attorney. A lawyer will guide you throughout the process, verify you comply with the franchise regulations, and ensure your business and its assets are protected against any potential risk.
Generally speaking, these are the steps you should follow to become a franchisor:
1. Develop and prepare a replicable business model: Analyze if your business is scalable and generates enough profit to become an attractive option for investors. Before deciding to enter a franchise, franchisees will ask key questions and do in-depth research to ensure your franchise is a worthy investment. This is why your business needs to be financially stable and prove its value.
2. Build your franchise consulting team: In addition to a franchise lawyer, rely on the expert advice of accountants and franchise consultants who will assess the feasibility of your business ventures.
3. Develop a new business plan: Adapt your existing strategy to a new model that is able to reach your expansion objectives.
4. Set up legally: Ensure your intellectual property is properly registered and that you can give access to your trademarks without risking your assets. Also, along with your franchise attorney and consulting team, create an FDD and franchise agreement. These legal documents will disclose your business’s history and performance to possible franchisees so they can decide to join the franchise and state the terms of your business relationship.
6. Create a training and support program: Draft the necessary operation manuals, training programs, and support systems for the franchisees to be prepared to operate and manage their branch.
7. Attract franchises: Market your business to attract possible franchisees and establish a selection process.
Franchisor advantages and disadvantages
Expanding your business
By franchising your business you will be able to increase your brand awareness and expand your territory of operations at a low cost. Franchisees will absorb the setting up costs of opening new locations.
Benefit from economies of scale
With more stores that need to supply their products, franchisors can have access to wholesale prices.
As a franchisor, you will only be responsible for maintaining the franchise as a whole and you don\’t need to get involved in specific procedures, such as recruiting employees in each of the existing locations.
High initial costs
The cost of starting a franchise is expensive in terms of money and time. Franchisors need to make a hefty investment to ensure they properly set up their franchise business. They have to consider the expenses associated with hiring the franchise team, regulatory compliance, creating manuals and support, and taking care of everything that will make it easier for franchisees to reproduce your business model.
Franchises are regulated at the federal and state level. A franchisor needs an efficient franchise legal team that will ensure their business is complying with all the laws.
Lack of control
A franchisor has to have rigid and clearly defined procedures to ensure their business vision and quality are met by all franchisees. The overall reputation of the franchise is always at risk of being affected by the franchisee’s actions.
Franchisor vs. Franchisee: What are the differences?
A franchisor will act as a mentor for the franchisee and provide all the necessary tools to facilitate the management of the franchise business. While a franchisor will contribute with a proven business model, guidance, and training, the franchisee will benefit from this knowledge and operate under the endorsement of the franchisor’s reputable brand in exchange for a fee and ongoing payments.
How do franchisors make money?
Franchisors receive profit by collecting fees and royalties from the franchisees. Some of the fees include:
Franchise fee: It’s the required initial fee to enter the franchise agreement. This payment is typically structured as a one-time flat fee that must be paid once the franchisee enters the agreement to grant the rights to the brand and the ability to sell its products.
Ongoing Royalties: Franchisors receive recurrent payments typically every month, that consist of a specific percentage of the generated revenue during that period
Add-on fees: Some franchisors require additional fees that cover their services for providing support, equipment, marketing materials, and other elements.
How do franchisors support franchisees?
Franchisors typically provide support to their franchisees in the following ways:
By allowing the franchisee to operate under their trademark
By giving access to their business model, trade secrets, operating procedures, market knowledge, and vendor assistance.
By training franchisees and assisting them before the location opens and after it has started operations. Assistance provided by the franchisor includes marketing and business development support.
What do franchisees typically have to pay the franchisor?
The cost of upfront fees varies widely, but on average, the initial fees for well-known companies are in the $100,000 to $300,000 range. Additionally, royalties typically consist of 4.6% to 12.5% of the branch’s monthly revenue.
Are franchisors liable for franchisees’ actions?
The franchisor’s liability depends on the degree of control they have over the franchisee’s business operations. For example, if the franchisor is closely involved in the day-to-day operation of the branch, the franchisor may be held liable for an incorrect implementation of the policies. Each case varies, and every situation must be assessed by a franchise litigation attorney.