Do you know what the difference is between a franchisor and a franchisee? You don’t? Great – that’s what we’ve written this article for. If you’re looking to ditch the nine to five and take the leap into the world of business ownership, franchising is a great place to start. Two of the biggest terms you’ll come across when franchising your business or investing in a franchise, are the terms franchisee and franchisor.
We’ve actually already covered in a bit of detail who a franchisor is, but in this article, we’ll recap on that, explaining more about each party. In order to understand the differences between a franchisor and a franchisee, let’s take a closer look at who each of these players is in the franchise sector.
What is Franchising?
If you’re starting out with franchising and not sure what franchising is, let’s go over some of the basics. Franchising is a method of business expansion where the franchisor will license out the usage of the company branding and system of operation to a franchisee who can trade as the business in their own area. Franchising is deemed one of several ways of getting into business ownership. There are numerous advantages between starting up alone and franchising but for many, franchising is considered a more viable option thanks to the availability of support.
There are a few different types of franchising concepts, but in the context of business ownership, is known as business format franchising. Franchising isn’t government regulated in the UK, and anyone can get involved with franchises. Most franchises don’t require you to have any past knowledge of business ownership either, because support and training is usually provided by the franchisor.
Just like any route to business ownership, you’ll need some money to get started. Most banks can lend up to 70% of the franchise investment, because franchising is generally a more favourable and successful route to business ownership. You will need a solid business plan, and the franchisor can help you with this.
When you become a franchisee, you’ll often get everything you need to set up and start running the business in exchange for your franchise investment. That includes training and support, something you won’t get if you were to start up alone. Let’s take a look at the two parties involved.
Who is the Franchisor?
In order to franchise a business, you need to actually have a business. The business needs to be deemed viable to franchise. If the business is sustainable, able to make ample turnover and has at least reasonable demand, the business owner might make the decision to franchise the business.
If the business owner decides to franchise the business, they become known as the franchisor. The franchisor may not necessarily be a sole individual. The franchisor may also refer to a company or group of companies which control the intellectual property of a business. In the latter scenario, some such examples are Costa Coffee and Amazon Logistics.
It will usually be the franchisor’s responsibility to source, profile and recruit new franchisees in order to help the business grow. The franchisor will advertise their franchise opportunity, making their business opportunity available to investors. In order to get to the point of advertising and marketing the franchise opportunity, the franchisor will have gone through considerable time and effort to deem the franchise feasible. This includes speaking to franchise consultants, mapping franchise territories and setting up a pilot franchise.
Responsibilities of a Franchisor
- To set up a pilot franchise to test the feasibility of franchising the business
- Produce the required franchising documentation including agreements and operations manuals
- Market the franchise opportunity and profile/recruit suitable franchisees
- Invest in research and development to ensure franchisees keep up with trends
- Provide training and support to franchisees so that the franchise network can operate in full effectiveness
- Form agreements with partners and suppliers to be used by franchisees
Benefits of Becoming a Franchisor
- Franchisors will benefit from an additional source of income in the form of franchise fees
- Financial expense in expansion is minimal, the costs are namely on the franchisee’s part
- In the same manner, international expansion via a Master Franchisee also carries simplicity
- Franchisors can expand reasonably fast thanks to planned franchise territories and recruitment goals
- The franchise network thrives as the brand becomes more and more recognised
Who is a Franchisee?
The franchisee is the party that purchases the rights to trade as the franchisor’s business. The franchisee will pay an initial investment – ranging from a few hundred to a few thousand. In exchange for this, the franchisee will often get training, support and starting marketing and stock. The franchisee will be expected to have some working capital to keep the business afloat until break even.
A franchisee might not necessarily need any past experience owning a business. This is because the franchisor will usually provide initial training and ongoing support. However, for more chance of success, the franchisor should prefer to recruit experienced entrepreneurs with interest in the business’s nature.
A franchisee will be given their own exclusive and sizeable territory to trade in. The franchisee will operate the franchisor’s business in their own area, enjoying the luxury of business ownership and minimising the chances of failure. When you make the decision to start up a business from the ground up, there are a lot of risks. You’ve got to find partners and suppliers. You need to produce a brand and logo, market it and by doing this, you really are starting from square one. But when you become a franchisee, you get near enough everything you need and that includes a massive head start over anyone starting up alone. Not to mention a wealth of support, not only from the franchisor but from a thriving franchise network and a community of franchising professionals and franchise associations.
Responsibilities of a Franchisee
- To pay monthly fees to the franchisor
- To abide by the franchise agreement
- Closely follow the franchise operations manual so that all franchisees operate in the same way, using the same suppliers, and offering the same products and services
- To input the necessary amount of time and effort needed to operate the franchise effectively – failure to run the franchise effectively can impact the entire network and reputation of the brand
Benefits of Becoming a Franchisee
- Lower risk route to business ownership – you’re buying into a business that works
- A “Business in a Box” with an already established, already recognised brand name
- Lower costs involved – you cut out mistakes and costs involved with establishing the business from the ground up
- Franchise finance is usually available either through the franchisor or banks
- Powerful support – from franchise associations to other members within the franchise network, help is always on hand and you won’t feel lonely
- Exclusive territory to trade in
Who is a MasterFranchisee?
Well i’m glad you asked that question. If a franchise network is doing really well, the franchisor might make the decision to expand internationally. But in this instance, they won’t start mapping and selling franchises in that country. They’ll look to recruit a master franchisee.
A Master Franchisee is very much like a franchisor, but for their own country. The master franchisee will undertake the responsibility of profiling and recruiting franchisees in their own country on behalf of the franchisor. The franchisor won’t have any experience or will only have minimal knowledge of the market and demand for the products and services outside of their own country. A master franchisee will have better knowledge of the market and will be in a position to work with the franchisor to better target the master franchisee’s area.
The franchisor won’t have to worry too much about recruiting franchisees internationally, because that will be one of the responsibilities of the Master Franchisee.
Responsibilities of a Master Franchisee
- Prepare and market franchise territories within their own country
- Work with the franchisor to deliver the franchisor’s brand internationally, but in a way that meets local demand. This might mean evolving and adapting the franchise’s offering to better appeal to international communities
- Form agreements with partners and suppliers which international franchisees can use, just like franchisees in the UK would
Franchisor – Franchisee – In Summary
To sum up, the franchisor is the original business owner and holds the responsibility of the direction of the business and franchise network. The franchisee becomes a part of the network by investing in the rights to trade as the franchisor’s brand. The franchisee enjoys a more successful and fully equipped route to business ownership, while the franchisor enjoys their brand getting a wider and more recognised presence.
If you’re looking to ditch the nine to five and morning evening commute, why not get into franchising? From franchise associations to franchise finance, there is so much support within the franchising sector. Franchising really is favoured by many as a less risk route to business ownership. Many people have already invested in franchises as well – parents enjoying a better work life balance, motivated entrepreneurs building a business empire. Is today the day you get into the world of franchising?