When a business wants to increase its market share or geographical reach at a low cost, it may franchise its product and brand name. A franchise is a joint venture between a franchisor and a franchisee. The franchisor is the original business. It sells the right to use its name and idea. The franchisee buys this right to sell the franchisor’s goods or services under an existing business model and trademark.Franchises are a popular way for entrepreneurs to start a business, especially when entering a highly competitive industry such as fast food. One big advantage to purchasing a franchise is you have access to an established company’s brand name. You won’t need to spend resources getting your name and product out to customers.
WHAT IS A FRANCHISE?
A franchise (or franchising) is a method of distributing products or services involving a franchisor, who establishes the brand’s trademark or trade name and a business system, and a franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system. Technically, the contract binding the two parties is the “franchise,” but that term more commonly refers to the actual business that the franchisee operates. The practice of creating and distributing the brand and franchise system is most often referred to as franchising.
There are two different types of franchising relationships. Business Format Franchising is the type most identifiable. In a business format franchise, the franchisor provides to the franchisee not just its trade name, products and services, but an entire system for operating the business. The franchisee generally receives site selection and development support, operating manuals, training, brand standards, quality control, a marketing strategy and business advisory support from the franchisor. While less identified with franchising, traditional or product distribution franchising is larger in total sales than business format franchising. Examples of traditional or product distribution franchising can be found in the bottling, gasoline, automotive and other manufacturing industries.
The Franchisee/Franchisor Relationship
The relationship between a franchisee and a franchisor is inherently one of advisee and advisor. The franchisor provides guidance and support on hiring and training staff, setting up shop, advertising its products or services, sourcing its supply, and so on.In return for the franchisor’s advisory role, use of intellectual property, and experience, the franchisee generally pays a startup fee plus an ongoing percentage of gross revenues to the franchisor.At the start, the franchisor assigns the franchisee an exclusive location far enough from its other franchises to avoid competition.
Franchisee Benefits
- The costs of opening a franchise can be lower compared to starting a company from the ground up.
- The business has immediate brand recognition, a ready-built supply system, and a professional marketing campaign already in place.
- Franchisees adopt the business practices of their franchisors rather than create them from scratch.
- The franchisor is invested in the success of its franchisees and will take an active advisory role.
Franchisee Responsibilities
A franchisee must follow the proven business model that is already in place, down to its choice of location, furnishings, products, and decor. Franchisors require this to maintain consistent quality among all of the locations using its brand name.The franchisee is responsible for growing the franchise via the usual means of advertising and marketing within its exclusive area of operation. However, all marketing campaigns must be approved by the original establishment before their release.As the manager of the franchise, the franchisee is expected to protect the brand name by offering only approved products and services that are created by or sourced by the original company.
FAQs
Does a Franchisee Own a Business?
Yes, a franchisee is the owner of the business. The owner is licensed to use products supplied by the franchisor. The franchisee is contractually obligated to use only products and services supplied by or authorized by the franchisor.
This limits the business owner’s scope and autonomy. A McDonald’s franchisee cannot sell a peanut butter and jelly sandwich or even hang a picture on the wall that isn’t issued by McDonald’s.
Is a Franchisee the Same As a Franchisor?
No. The franchisor is the entity that owns the intellectual property, patents, and trademarks of the brand or business being franchised. A franchisee buys the right to operate a location of the franchisor.
Can a Franchisee Be Fired or Removed?
A franchisee can effectively be fired. The franchisor can shut down one of its licensed operators that breaks the rules. Those rules allow the franchisor to act quickly if a franchisee is discovered to be running a location that fails to meet health and safety guidelines, among other infractions.
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