If you’re looking to start your entrepreneurial journey in 2022 one way to do it is by becoming a franchisee of profitable franchise business. Established entrepreneurs can also expand their business operations into new territories by buying franchises.
Buying a franchise unit makes the buyer a franchisee, while the company that sells the franchise is known as the franchisor. Both parties play different roles in the franchising business model, which can sometimes be confused together. This article takes a deep dive into the differences between a franchisee and a franchisor.
But first, let’s define the two franchise roles properly:
Who is a Franchisee?
A franchisee is an investor who pays for the rights to use the trademarks and business model of a successful brand. There are different franchisee categories, including single-unit, multi-unit, and master franchisees.
Who is A Franchisor?
A franchisor is a company that sells business rights to a franchisee to open and operate franchise stores under its trademarks. A franchise unit is eligible to sell proprietary product lines using the franchisor’s business model. Franchisors are seen in all industries.
When entering a franchise agreement, the franchisor and franchisees assume different roles and responsibilities. Here are the different roles of a franchisor and a franchisee:
Franchisor Roles and Responsibilities
Investors decide to become franchisees because they believe the company has systems and processes in place that will lead to success. Franchising is often believed to be a less risky path to business ownership because you have a proven model, and support from the franchisor to help you succeed. Franchisors are responsible for providing franchisees the following:
Create a Brand and Scalable Business Model
Franchisors are expected to have successfully operated their business model to a level of profitability before considering franchising. The brand must have systems and processes that are scalable enough for franchisees to invest in.
Provide the FDD and Franchise Agreement
The franchisor is responsible for generating the franchise disclosure document (FDD) for the franchisee before any agreements and investments are made. The FDD has 23 sections and contains organizational, financial, and operational information about the franchise.
After carefully reviewing the FDD, if a prospect and the franchisor decides to move forward, the franchisor presents the franchise agreement. The franchisor creates the two documents objectively and according to the Federal Trade Commission (FTC), the government body that oversees franchising in the United States.
Maintain Brand Image
A franchisor focuses on maintaining its directly owned stores and improving its overall brand image. Company-owned stores serve as a model to other franchise units, helping them implement new ideas.
Provide Support to Franchisees
A franchisor acts like a parent to its franchisees by offering initial training and ongoing support to ensure they are adequately equipped to run their franchise units. The training system includes physical and onsite training for franchise owners.
Ongoing support is provided by the franchisor, and many brands have tools that allow franchisees to easily communicate with each other to get support, advice and ideas from fellow franchisees.
Creation of Company-wide Marketing Materials
Franchisors provide official company-wide marketing materials to franchisees, such as signage, marketing collateral, ad templates, social media templates and more. Franchisees can still advertise and market locally as they deem fit, but the provision of these marketing materials helps elevate their ability to get results.
Also, the franchisor provides national marketing support via overall brand advertising and marekting. They also guide the information that should be on marketing materials.
Franchisee Roles and Responsibilities
These are the responsibilities a franchisee plays in the franchising business.
Maintain Existing Brand Reputation
Franchisees are brand ambassadors for companies from whom they bought their stores. Their business activities directly impact the public perception of the franchisor’s brand.
For example, The Halal Guys have successful franchise units across America. If a customer has a bad experience at one restaurant, it will likely impact their decision to try another location, as well as to share that one bad experience with friends and on social networks.
Hire and Train Employees
A franchisor grants its franchisees the autonomy to make their hiring decisions with guidelines such as an organizational chart or the mandatory roles that must be filled in an organization before operations start.
“One of the things that Fransmart advised me was to make sure that I hired the right person as your director of operations,” said Rick Fisher, a multi-unit operator of Five Guys. “We hired the director of operations as our first employee, and it was a little more expensive, but it made all the difference.”
Follow the Rules and Guidelines
Franchisees do not need to do the heavy lifting of strategizing, developing a business model, and creating products. They are only required to follow the franchisor’s existing business models and operational guidelines.
Franchisees are paying for the systems a franchisor has created. If an operator isn’t interested in following them, they should never become a franchisee. Breaking the franchisor’s operational rules may lead to sanctions and ultimately risk declination of getting approved for a franchise renewal later.
A franchisee is responsible for identifying a suitable location for their franchise unit, subject to the franchisor’s approval. The area selected by the franchisee will be examined on the territorial guidelines of the franchisor. If the franchisor offers protected territories, every new location must follow such rules and be positioned not to affect current and future franchise locations.
The franchisee is also responsible for the build-out costs and lease costs of the new franchise unit. Equipment and real-estate lease costs must be appropriately financed.
Manage Daily Franchise Operations
Franchisees are responsible for the daily operations of their franchise units. Although franchisors may suffer considerable loss when a franchise unit fails, the impact will be felt more by the franchisee.
According to Fisher, the key to success is to establish a strong operations team from the get-go.
“I was an investor, so an operations team was my number one priority,” he said.
Finance Initial Investment Costs and Pay Ongoing Fees
Franchising comes at a cost to franchisees, including franchise fees, leases, and equipment purchases. The total initial investment costs may be financed directly by the franchisee, through franchisor financial support, or third-party financial services firms. The operating cost of the franchise, including royalty and marketing fees, are also paid by the franchisee to the franchisor.
The use of the terms franchisor and franchisee interchangeably is a widespread error. The franchisor owns the company brand, business model, and trademarks, and the franchisee pays for rights to use them after fulfilling specific requirements. The franchising business model offers benefits to both franchisors and franchisees.
If you have a business you’re interested in franchising, or if you are a prospective franchisee looking for the right opportunity, Fransmart can help you get started on your franchising journey.