Comparison between franchisor vs. franchisee is always an exciting topic. Franchising is more popular every day among entrepreneurs because it provides excellent opportunities for all parties involved in it. Just look at your surroundings, and you will notice that most facilities that offer various services operate on the franchise business model.
By dealing with the franchise system’s concept and processes of functioning, we often encounter queries about the differences between a franchisor vs. a franchisee. Many people are considering starting their own business, and franchising is ideal for inexperienced entrepreneurs. This business model has a higher success rate than starting a business from scratch, which shows how efficient this type of business can be.
Before we dive into the relationship between franchisor vs. franchisee, we will explain a little bit more about who is who.
Who Are Franchisor and Franchisee
The franchisor and franchisee are the two parties that make the franchise system. The franchisor’s job is to ensure that the operation and growth of the system go smoothly, and that will result in that the recognition and quality of the brand will be better. All these benefits will later use the recipient, whose job is to monetize the system in a profitable way for both parties involved in it.
Thanks to a well-known brand, the recipient and the franchisor together build an identity and reputation in the eyes of their customers. These two business partners need to communicate daily because, in that way, they can scale their business. Communication is the main driver for the success of the franchise system.
Franchise systems are based on the partnership that the franchisor establishes with the franchisees. It is essential to understand that every franchise system is different. Hence, the connection between a franchisor vs. franchisee depends on the industry in which they operate.
For a franchise to be successful, the relationship between franchisee and provider must be predetermined by the franchise agreement.
However, each of these parties has different obligations and rights, depending on who is who in this partnership. Because of that, it is crucial that we present them to you separately, one by one.
Who is Called a Franchisor
A franchisor is a company that offers the right to use its brand trademark, products, and know-how of doing business to another company, which pays fees in return. These fees are paid according to gross revenue from the products and services. The franchise agreement is the “glue” that connects these two parties, and it defines the fees and conditions under which the franchisee must work.
An entrepreneur or company that sells the rights of its brand is called the franchisor; these rights include the right to license the trade name, trademarks, and signs. The participants of the franchise system work together, and the goal is to sell more branded goods and services; this process can happen through retail and wholesale.
A company can become a franchisor only when it develops its business model to the maximum and when it has a good position in the market. Extremely successful business brands and companies use this business model because it offers faster growth of the number of units with less money invested.
Franchisors are companies that:
- Produce or sell recognizable products
- Use their system of sale that has been tested in the market
- Have the ability to transfer their methods of doing business, knowledge, and experience to the other interested entrepreneurs through training and ongoing support
The franchise system’s success is influenced by the ability of the franchisor to solve problems in record time. The relationship between the franchisor and the franchisee can be compared to a marriage.
Developing good relationships between the franchisor and the franchisee is key to the success of this business model. Also, the franchisor must constantly improve his work system; all processes need to be carried out by the trends that prevail in the market at that time.
Who is Known as Franchisee
The franchisee is an entrepreneur who invests his capital for the rights to use the business model from the franchisor. This relationship is closed by a franchise agreement for a certain period of time and in a particular geographical area. Franchising is based on rights given to an individual (franchisee) to conduct a specific type of commercial activity under the “umbrella” of a well-known brand.
Franchisee takes advantage of the benefits offered by the customer base from the franchisor- benefits of selling products and services under a recognizable name. This saves a lot of money on marketing; jobs started from scratch require a significant initial investment in marketing. On the other hand, franchising is beneficial because most franchisors have been in business for many years, and that has resulted in brand awareness.
Franchise recipients can be all people who have the will to embark on this business venture. The franchisee is an independent entrepreneur – more sales= more profit. The franchisor charges for his service through a royalty fee, and all other profit that the franchise makes stays with the franchisee.
The franchisee can be:
- Entrepreneur beginner
- Unemployed persons
- An employed person who want to change carrier
Many entrepreneurs choose this type of business partnership because it has less failure rate than an independent business. Franchisees will get franchisor know-how, and that is most important, especially for inexperienced entrepreneurs.
The recipient of the franchise needs to understand how franchising works. The franchise disclosure document will reveal all about a particular franchise, and because of that, it is good to research every detail of this document.
The franchisee must have an entrepreneurial skillset; the franchisor will not do everything, the recipient will need to take care of certain things. First of all, the recipient needs to find franchise unit space, hire workers and manage a business in real-time.
Connection Between Franchisor and Franchisee
Trademark creates the connection between the recipient and the franchisor; these two business parties work together to upgrade the brand further. The franchisor brings a Trademark of the brand and know-how; the franchisee brings daily business management. This partnership in which each party brings something creates a symbiosis that positively affects business operations.
A franchise concept always includes an agreement under which one company supplies another with appropriate products, equipment, and related services. Franchisee sells those products and provides services to end-users (consumers). All the conditions under which the work is performed are determined by the franchise provider company, and it is up to the recipient to apply them in the right way.
Under a franchise agreement, the franchisor provides a certain level of independence; the recipient is responsible for making decisions and applying them in real time. Thus, the recipient can decide who to hire and how to manage its franchise.
The ongoing franchise fees also connect the provider and the recipient; the services provided by the franchisor are paid from the gross revenue of every franchise. Franchising is a business model used in various industries, so this model can be applied almost in every type of business.
Characteristics of relationships franchisor vs. franchisee:
- Coordinated work that must be accompanied by business goodwill
- The provider gives the franchisee a license, which allows the franchisee to present his company on the market under the provider’s name
- Both parties must accept obligations that have been closed by a franchise agreement and must strictly adhere to them
- The recipient must pay specific fees for the entire duration of the franchise agreement; the contract will be nullified if the recipient does not fulfill obligations toward the franchisor
- The franchisee must get training about all aspects of the franchisor franchise system
- The franchisor must maintain a continuous relationship with the recipient and provide ongoing business support
- The franchisee must be an independent entrepreneur and invest his funds in the business
- The recipient must get consult with the franchisor if he wants to sell his franchise
How to Become a Franchisor
Companies should start thinking about further developing their business by the franchising model only after they have a large base of satisfied customers and clients. If the business is booming, there will always be someone ready to “copy” that concept. For a franchise to be successful, in addition to popular products and services, a company must also have a proven business model.
Know-how will maintain a good franchisee vs. franchisor relationship, and therefore every company must work on standardization of an easily applicable business model. Preparing a company for franchising is a complex process.
Initially, with the help of a lawyer, templates of several documents must be prepared to make this relationship in line with the law of the state in which the franchisor conducts its business operations.
Documents that the franchisor must have:
- Franchise Disclosure Document, or FDD
- Franchise agreement
- Operational manual
These documents define the conditions under which new partners (franchisees) will join the network. The franchisor who is fully prepared to expand the network should create a detailed profile of the desired candidate.
An ideal franchisee is a person who will respect and apply the rules and standards of the network, who knows and understand what a franchise is and who will be actively involved in the business of the franchise branch.
The franchisor must also define the franchise fees, which recipients will pay for received know-how, training, and support. The amount of fees will not only determine the provider’s income; it will also determine how much the franchise will be “attractive” and available to potential recipients.
Because of all these processes and the numerous documents that need to be prepared to develop the franchise concept, most companies decide to seek help from consulting companies specializing in franchising.
When we talk about the difference between franchisor vs. franchisee, we can see that the provider has more responsibility in this relationship because his business reputation is on the line here.
Who is The Ideal Franchisee
Starting or buying a franchise is ideal for people that are considering starting their own business with less risk than that is the case with an independent company. Instead of developing a business from scratch, franchisees become business owners by buying a proven business model. They get a franchise package that contains the entire business experience of the franchisor.
However, franchising has many advantages and disadvantages, so it is not as easy to become a franchisee as it seems at first!
Franchisors are careful and very demanding in choosing partners who will work under their brand. If you want to be a franchisee, you will need to have financial stability, a desire to progress, and a talent for business. Also, you will need to have initial investment funds that are not small.
Franchisors very often take into account what the franchise candidates were doing in the past. Success in specific industries and activities can reflect your ability and can be a key recommendation for you as a candidate.
When a franchisor is looking for an ideal recipient, it will consider only people with specific skills. Good sales skills, employee management skills, financial intelligence, and the ability to follow the protocol will all be a big plus for the potential receiver of the franchise.
Potential franchisee needs to know:
- What conditions must be met in terms of territory and premises ( location size, and how must be the appearance of the store)
- The amount of investment required (entry franchise fee, landscaping costs, purchase of equipment and goods)
- The amount and structure of running costs
- Expected return on investment (ROI)
- What the support package of the franchisor contain
- Before signing the contract, the franchisor is obliged to provide the franchisee with a franchise disclosure document
Every business behaves like a living being, and franchising is no exception. Whether you are a franchisor or a franchisee, you need to have good business skills and a will to progress. Franchising is a collaboration in which both parties have a chance to succeed.
There are some differences between a franchisor vs. franchisee. However, these differences must not be an issue; they manifest only because each of these two parties has its own radius of operation.