For individuals who dream of owning a business, becoming a franchisee is a good place to start. For people who already own a business, taking on the role of a franchisor can help expand and grow your operations into new locations.
But when it comes to franchisee vs. franchisor, what are the terms of ownership? Who’s responsible for marketing materials? Can a franchisee make their own rules for their store, or do they have to abide by the franchisor’s existing regulations?
Let’s dive into the differences between a franchisee and a franchisor — from what each term means to the roles and responsibilities for both parties.
What is a Franchisee?
A franchisee is a person who pays fees — both royalties and upfront costs — to a business owner, called the franchisor, to operate a business under the franchisor’s trademarked name and business systems.
Both franchisors and franchisees take on various benefits, risks, and responsibilities when they form working relationships with one another. The franchisee must adhere to the franchise, so following the contract and operating under the provided guidelines are a must.
Franchisee Roles and Responsibilities
1. Upholding Brand Reputation
First and foremost, the actions of a franchisee can and will reflect on the entire company. For example, if a customer is treated poorly or a franchisee has an outburst, this could lead customers to boycott other company locations — as the franchisee’s actions are directly tied to the brand as a whole.
2. Hiring and Training Employees
The franchisee will need to put out job postings, review applications, interview prospective candidates, and train new employees — but the franchisor may assist with this by providing training materials or hiring guidelines.
3. Following Rules and Guidelines
The benefit to becoming a franchisee is that you save money on fully developing a business from scratch — but in return, you must be willing to abide by the franchisor’s vision. If that means wearing a specific uniform, performing inventory via a specific protocol, or advertising through provided signage, you need to follow those expectations.
4. Finding and Leasing a Building
The franchisee will need to find the location for their business and pay the leasing fees. A franchisor may also help with finding a good location for the franchisee. The franchisor will also likely provide necessary fixtures, furniture, and store signage for the new location.
5. Manage Day-to-Day Activities and Performance
The franchisor will certainly take on some risk if a new business fails, but the burden of turning it into a successful company ultimately comes down to the franchisee.
The franchisee will manage the daily activities that go into keeping a franchise location operational — including opening the store, overseeing sales, and locking up at the end of the day. The success or failure of a specific location ultimately relies on and heavily impacts the franchisee.
6. Paying Ongoing Fees to Franchisor
The cost of operating, using an existing business’ brand, business model, and operational systems occurs in the form of royalties. Franchisees will pay royalties to the franchisor monthly. In fact, even if a franchisor goes into bankruptcy, franchisees are typically expected to continue operating and paying royalties.
What is a Franchisor?
A franchisor is a company owner that owns the rights and trademarks of the company and its business model, systems, and products.
The franchisor sells the rights to operate under its brand, sell its products, and operate following its business model to other business owners without losing control of the company. While the franchisee handles the day-to-day of their specific store, a franchisor must look at the bigger picture and plan for the future of the brand based on all of its franchisees.
Franchisor Roles and Responsibilities
1. Creating a Brand and Scalable Business Model
Before anyone can enter a franchise, there needs to be an established brand and a scalable, sustainable business model. The franchisor will need to put forth the financial and creative labor to make this happen before the business can begin to expand through franchising.
2. Managing the Brand and Its Products or Services
The franchisor will need to handle the overall brand image — from the tone to the business systems, plus the products and services. For example, a franchisor would be responsible for creating a limited-time product that will be sold at all of the company’s locations.
3. Providing Support
A franchisor will need to offer ongoing support to its franchisees. If a franchisee needs help with inventory, new-hire training, or advertising, the franchisor will need to provide the necessary guidance — even years into the franchise agreement. In exchange, the franchisor receives ongoing royalties from all of its franchisees.
4. Creating Marketing Materials
Although franchisees are responsible for how they advertise and market themselves locally, the franchisor needs to offer the materials and overall guidance for how franchisees should do this. Franchisors are also responsible for national marketing.
For example, the franchisor behind a major fast-food restaurant chain will be responsible for TV commercials and offer signage for franchisees to hang in their windows or general guidelines for what to put on their outdoor sign displays.
5. Vetting and Training Franchisees
Franchising a business comes with financial risks if the location fails. Someone might come to you with all the money to get started but lack the right attitude to work with employees and customers. Or maybe, they don’t have experience with day-to-day business operations.
The franchisor needs to thoroughly interview franchisees to make sure they are cut out to run a business, then they can provide successful candidates with the training and support needed to help the business grow and profit.
6. Planning for the Future
Franchisors need to know where they want the business to go moving forward. The franchisor is responsible for the overall success of the brand, so they must know how to continuously improve operations, expand the business model, and innovate upgrades or new products and services to fulfill consumer needs.
Types of Franchises
There are several types of franchise structures, but here are a few of the most common franchise types.
Business Format Franchise
The business format is the most prominent category of franchises — and it’s likely what you think of when you hear the term "franchise" itself.
In this type of franchise, a franchisor provides the brand, the products, and the operational and marketing systems. Many restaurant chains, retail stores, and gyms follow this style of franchising. New stores open under the training and guidance of the franchisor.
The new store takes on the trademarked name, brand colors, cash register systems, marketing signage, and products. Employees are trained in a way that a traveling customer can generally expect the same experience at any given franchise location — no matter what city they're in.
Product Distribution Franchising
This model of franchising focuses solely on the product. Franchisees may sell the products, but they won’t necessarily follow a franchisor’s operations and business model.
For example, many retailers sell LG appliances, but each retailer follows different business models. They are simply franchising the LG products. Car parts, computers, and farm or construction equipment are all common examples of product distribution franchising.
Job franchising is a small-scale type of franchising and is often common for companies selling services. For instance, a franchisor may start a daycare business and will hire a few daycare providers to operate under the small business’ brand. Common examples of job franchising include local lawn care services, house cleaning companies, and plumbing businesses.
Franchisee vs. Franchisor
As you can see, there are many differences between a franchisee and a franchisor. The franchisee is a small business owner that handles the day-to-day management of a specific location.
The franchisor oversees the big picture for an overall brand and all its franchisees. Each party owes the other something, whether that be royalties from the franchisee or ongoing support and rights to existing branding from the franchisor.
Examples of Franchisees and Franchisors
Many of the biggest examples of franchisees and franchisors are found in the food industry. But everything from gyms to hotels to movie theaters to retail shops can all operate under franchises.
Some of the most well-known franchisors in the food business include McDonald’s, KFC, Olive Garden, and Dunkin’.
Popular franchisors in retail include Bath and Body Works, Plato’s Closet, and Gap, Inc.
Other franchisors in the fitness industry include Rumble Boxing, 9Round, Pure Barre, Club Pilates, and Anytime Fitness.
Hotels are another popular franchise opportunity. Major hotels like Super 8, Hampton by Hilton, Hyatt Hotels & Resorts, and Days Inn operate under franchises.
One unique example of a franchisee, rather than a franchisor — existing from a nearly bygone era — is Blockbuster. The franchisor declared bankruptcy and closed in 2010, but to this day, one franchisee’s location exists in Bend, Oregon.
Franchises Bring Benefits and Risks to All Parties
There are many benefits and risks for both the franchisee and franchisor. They both depend on one another for success, but there are instances where either can fail while the other succeeds.
Ultimately, a successful franchisee and franchisor will need to be communicative, innovative, and in tune with current trends to continue to grow. Plus, companies that focus on high-quality products and top-notch customer service are more likely to succeed.
Originally published Sep 27, 2021 7:00:00 AM, updated September 27 2021