A franchisee is an independent business owner who operates a third-party retail outlet called a franchise. By doing so, the franchisee has purchased the right to use an existing business’s trademarks, associated brands, and proprietary knowledge to market and sell under the same brand name while upholding the original business’s standards.
Key Takeaways
- A franchisee is a business owner licensed to operate a branded outlet of a retail chain.
- The franchisee pays a fee to the franchisor for the right to sell its established products and use its trademarks and proprietary knowledge.
- The franchisee receives guidance and operational and marketing support from the franchisor.
- The franchisee is required to market and sell the same brand and uphold the same standards as the parent company.
Understanding Franchises
Franchises are a common way of doing business in numerous countries. It’s hard to travel through a city without encountering franchise businesses like McDonald’s, Subway, UPS, and H&R Block. Franchise opportunities span a variety of industries.
When a business wants to increase its market share or expand its geographical footprint at a low cost, franchising its product and brand name is a strategic solution. The franchisor is the existing business that sells the right to use its name and idea, while the franchisees purchase the right to sell the franchisor’s goods or services using its successful business model and trademarks.
The Franchisee/Franchisor Relationship
This relationship is inherently one of guidance and support. The franchisor provides advice and existing frameworks for hiring, training staff, setting up the business, advertising, and sourcing supplies. In return, the franchisee pays a startup fee plus an ongoing percentage of gross revenue.
Upon agreement, the franchisor often grants the franchisee an exclusive location, far from other franchises to avoid competition. Despite the potential high initial fees, investing in a franchise can be beneficial, so it’s essential to thoroughly research before making a decision.
Franchisee Benefits
Operating a franchise can be appealing, especially for entrepreneurs with limited experience in business management, because:
- The costs of opening a franchise can be lower than starting a business from scratch.
- The business provides immediate brand recognition, a built-in supply system, and an existing marketing campaign.
- Franchisees can adopt the business practices and models of their franchisors rather than creating these from scratch.
- The franchisor is invested in their franchisees’ success and often takes an active advisory role.
Franchisee Responsibilities
A franchisee must follow the proven business model, including choice of location, furnishings, products, and décor, to maintain consistent quality among all branded locations.
The franchisee is also responsible for marketing and advertising within their exclusive area, but any campaigns must be approved by the franchisor. Customers are to receive uniform products and services, protecting the integrity and reputation of the brand.
Example of a Successful Franchise: McDonald’s
A prime example of a flourishing franchise is McDonald’s. Founded in 1940, the first official franchise was opened by Ray Kroc in 1955. As of 2023, McDonald’s operates over 38,000 restaurants worldwide, with 93% owned by local entrepreneurs.
McDonald’s supports its franchisees by owning the land and buildings used by them and providing essential materials, while franchisees contribute a portion of the setup costs. It’s noteworthy that potential franchise buyers must have significant non-borrowed personal resources.
The success of McDonald’s resonates in its adherence to consistent quality standards globally, ensuring that a Big Mac in Los Angeles maintains the same quality as in London. Franchisees manage pricing and staffing but capitalize on McDonald’s brand equity and expertise.
FAQs
Does a Franchisee Own a Business?
Yes, a franchisee owns the business but is licensed to use the franchisor’s products and methodologies. They are bound by contractual obligations to maintain quality and seek approval for deviations.
Is a Franchisee the Same as a Franchisor?
No, the franchisor owns the brand and intellectual property, while franchisees purchase rights to operate under that brand.
Can a Franchisee Be Fired or Removed?
Yes, a franchisee can be terminated if they violate the contractual terms, especially relating to health, safety, or brand standards.
Conclusion
Franchising offers a viable business model for aspiring entrepreneurs who prefer buying into a proven system rather than inventing one from scratch. Companies like Dunkin’, Domino’s Pizza, and Subway provide various franchise opportunities, while newer franchising models are emerging in industries like healthcare and services.
Related Terms: franchise, franchisor, franchising, licensing, business model.
References
- McDonald’s. “Our History”.
- McDonald’s. “Franchising Overview”.
- McDonald’s. “Can You Still Get a McDonald’s Franchise (in the United States) and How Much Does It Cost?”
