Franchisee
Summary Definition: An individual or entity that purchases the rights to operate under another company's name, trademarks, products, and business model.
What is a Franchisee?
A franchisee is an independent business owner who’s purchased the right to use an existing company's brand, name, knowledge, and intellectual property. The franchisee can use 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. 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 and standards. This arrangement allows the franchisee to benefit from a well-known brand, a proven business model, and ongoing franchisor support while having the independence to run their own business.
Key Takeaways
- A franchisee is a person or entity that buys the rights to use another company's name, trademarks, products, and business model.
- Franchisees receive numerous benefits through this partnership, such as access to suppliers and marketing material.
- 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 terms, often confused, reference the two parties in a franchise:
- A franchisor is an established business that offers franchisees a chance to sell products or services under its name.
- A franchisee is a local establishment that holds the rights to operate a business under the franchisor’s name.
The franchisee is responsible for most of the on-site business tasks (e.g., hiring employees and managing finances), but it benefits from having access to the franchisor’s suppliers and marketing material.
Simply put, the franchisor can be thought of as the mentor or "parent" of the franchisee.
How to Become a Franchisee
The process of becoming a franchisee varies from industry to industry. However, there are several broad steps that are usually involved:
- Research: Potential franchisees must understand the industry well, including the different franchisors operating within it.
- Assessment: Franchisees carefully examine their finances and goals to determine which franchisors would make good partners. The initial investment cost and ongoing fees are considered, as different franchises charge different rates.
- Talk to franchisors: The next logical step is to reach out to appropriate franchisors to learn more about them, their requirements, and their company culture. Some may hold seminars or expos that can be attended. Their Franchise Disclosure Document (FDD) is also reviewed, which covers all the pertinent details.
- Secure financing: After they know what they’ll be paying for, the franchisee arranges adequate financing for the initial franchise fee, operational costs, and other expenses.
- Sign the agreement: The franchise agreement can be signed when both parties are satisfied with the terms and conditions.
- Training and preparation: Franchisors typically provide training programs to familiarize franchisees with their business model, operations, and standards. This prepares the franchisee to run the franchise.
Pros and Cons of Becoming a Franchisee
While there are several benefits of becoming a franchisee, 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 future marketing, branding, 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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