Franchisee
Summary Definition: An individual or entity that purchases the rights to operate under a franchise system (i.e., use another company's name, brand, products, and business model).
What is a Franchisee?
A franchisee is an independent business owner who has purchased the right to use an existing company's brand, name, knowledge, and intellectual property. The franchisee can leverage these resources to open and operate a third-party outlet known as a franchise.
The franchisee buys into an established business system owned and operated by a franchisor to expand the franchise business brand’s presence. In return, franchisees pay the franchisor an initial fee and ongoing royalties to use the resources and support the franchisor provides.
Usually, franchisees adhere to franchisor-set operational guidelines, standards, and requirements. This preserves the quality of the business’ services or products and allows the franchisee to benefit from a well-known brand, an established business model, and ongoing franchisor support while maintaining enough control to run their own business.
Key Takeaways
- A franchisee is a person or entity that offers to buy the rights to use another company's name, brand, products, services, and business model within a franchise system.
- Franchisees receive numerous benefits through this investment, such as supplier access, effective marketing materials, and customer engagement services.
- While the operational costs are lower than running an entirely independent business, franchisees must pay a high startup fee and ongoing royalties.
Franchisee vs. Franchisor
These two, often confused, terms reference the two parties in a franchise:
- A franchisor is an established, successful business that offers franchisees a chance to sell products or services under its name.
- A franchisee is a local establishment with the rights to operate a business under the franchisor’s name.
The franchisee is responsible for most on-site business tasks (e.g., hiring employees and managing finances), but it benefits from having access to the franchisor’s reliable suppliers, successful marketing materials, and other support services.
Simply put, the franchisor can be considered the mentor or "parent" of the franchise agreement.
How to Become a Franchisee
The process of becoming a successful franchisee varies by industry, but it’s always important for a potential partner to understand the nuances of the established franchise business model. To that end, several steps are usually involved:
- Research: Potential franchisees must understand the industry well, including its different franchisor businesses and the various products or services they offer.
- Assessment: Franchisees carefully examine their finances and goals to determine which franchisors would make good business partners and which franchise model is a good fit.
- Talk to franchisors: The next logical step is to reach out to appropriate franchisors to learn more about them, their model’s requirements, and their company culture. Some may hold seminars or expos that potential partners can attend to gain firsthand experience and insights into available franchise opportunities. The franchisor’s Franchise Disclosure Document (FDD) is also reviewed, which covers all the pertinent details.
- Secure financing: After gathering all the necessary information, the franchisee arranges adequate financing for the initial franchise fee, operational costs, and other expenses, such as building maintenance or advertising.
- Sign the franchise agreement: The franchise agreement can be signed when both parties are satisfied with the terms, conditions, and legal requirements.
- Training and preparation: Franchisors typically provide training programs to familiarize franchisees with the business' operations and service standards. This prepares the franchisee to run the franchise.
Pros and Cons of Becoming a Franchisee
While there are several benefits of joining a franchise business, there are also some challenges to be aware of.
| Benefits | Challenges |
|---|---|
| Lower initial overhead costs compared to starting a company alone | Ongoing franchisor fees and royalties that reduce overall revenue |
| Immediate brand recognition and a ready-made customer base | Strict brand guidelines that can limit the franchise's future advertising and supplier decisions |
| Access to strong marketing resources, intellectual property, and supply chains | Handcuffed association with the overall performance, publicity, and reputation of the franchisor |
| An invested partner (i.e., the franchisor) who provides advice and support, such as leadership experience and employee engagement training | Possible difficulties parting ways with a franchisor, including legal issues regarding contractual obligations, non-compete clauses, or restrictions on selling the franchise |
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