What Is a Franchisee?

If you’re thinking of starting your own business or becoming an entrepreneur, a franchise agreement is one of your choices. As a business model, a franchise system is usually less risky. You don’t have to develop a unique business idea or as many start-up costs.

The franchise model has a separate set of pros and cons. Becoming a franchisee has many benefits, but it is a legally binding agreement. You’ll reap the rewards of business and marketing support in addition to the franchisor‘s business system and brand name. But you’ll need to follow the franchisor’s branding guidelines and successful business model.

But what does franchisee mean exactly? Before you enter a contractual relationship, you should know your responsibilities and what you’re getting into as a franchisee. Below we’ll explore typical franchisee responsibilities and why becoming a franchisee can be attractive to a small business owner.

Quick Takeaways:

• Franchisors partner with franchisees to expand their geographical presence and reach.
• A franchisee is a business owner who pays an initial fee and ongoing royalties to a franchisor.
• The franchisor lets the franchisee use their established brand name and business model in exchange for these costs.
• Franchisees are responsible for the day-to-day management of the store or location, including hiring employees, but they must follow the franchisor’s approved business formats.
• A franchisor owns the intellectual property and proprietary knowledge that makes up the original business model.
• Franchisors provide initial and ongoing support to franchisees, helping them learn new skills and grow their business.
• Some benefits of being a franchisee include access to an existing customer base, brand recognition, a proven business model, support from another company, and predictable recurring costs.
• Some drawbacks of being a franchisee include less creative control than with other business models as well as higher upfront and ongoing costs.

What Is the Definition of a Franchisee?

A franchisee is a business owner who pays an initial fee and ongoing royalties to a franchisor. The franchisor lets the franchisee use their established brand name and business model in exchange for these costs. For example, many fast-food locations are franchises.

While every location sells identical products and services, each franchisee operates its location as a separate business. The franchisee is responsible for the day-to-day management of the store or location, including hiring employees. However, they must use the franchisor’s approved business formats, such as marketing materials and brand standards.

Sometimes a franchisee pays an initial franchise fee to take over an existing store. Other times, this fee helps cover the start-up costs for a new location. A franchisee is also responsible for managing operational costs, including ongoing fees representing a percentage of the store’s sales.

By agreeing to follow the franchisor’s system standards, a franchisee maintains the same experience for the brand’s loyal customer base. Think about what you experience when going to a fast food brand, regardless of location. Typically, you’ll walk into stores with the same look and feel and approved products.

What Is the Role of the Franchisor?

A franchisor owns the intellectual property and proprietary knowledge that makes up the original business model. Think of a world-famous restaurant chain like McDonald’s or Pizza Hut. A franchisor’s brand may include a trademarked name and exclusive products or services.

While a franchisor could open up more locations with a franchisee, it may not be as cost-effective. Instead, franchisors partner with franchisees to expand their geographical presence and reach. A franchisor provides initial and ongoing support to franchisees, helping them learn new skills.

A franchisor already has the know-how and a proven business model. They sell the rights and knowledge while monitoring franchisees for quality control and helping them succeed in their businesses. Since franchisors earn ongoing royalties on the gross revenues of franchisees, the franchise system can be more effective than expanding market share.

It costs money to operate a network of corporate or franchisor-owned stores. But with franchising, those expenses are on the shoulders of franchisees. As a result, the franchisor’s brand gets more exposure, and the franchisee and franchisor earn money.

What Are the Benefits of a Franchise Business?

Knowing what’s a franchisee is half the battle. You also need to evaluate franchisee benefits to make a decision. New franchisees can feel overwhelmed or misled if they only look at how the franchise industry operates. But for budding entrepreneurs just starting out, making an initial investment in a business plan with established products and services is beneficial.

For starters, you get the marketing power and brand recognition of an existing business’s trademarks. You don’t have to go through the laborious process of inventing your own products and services or getting patents to protect them. The franchisee meaning in business pertains to the idea that you can buy the rights to franchisor licenses and hit the ground running.

If you haven’t run a business before, franchising will give you a successful business model to follow. Plus, you’ll get support from another company already making its mark in the marketplace. Therefore, attracting customers won’t be as difficult, and you’ll have someone to turn to with questions.

That said, you’ll still need a financial advisor or someone on your side with accounting skills. You’ll also want someone with managerial and HR/people skills. Yet, running a franchise may allow you networking opportunities to speak with other franchisees. Since you’re all operating under the same brand name, you have a collective interest in maintaining its positive image.

Should I Pursue Franchising?

The decision to become a successful franchisee isn’t one you make overnight. The franchisee definition means you’ll be more limited in how you can operate your business. A franchisee is a small business owner who sells only approved products or services, meaning you won’t have much room for deviation or creativity.

In addition, a franchisor will get a portion of your gross revenues. A franchisee’s business success is dependent on two parties achieving financial goals. Each franchise agreement can vary in terms of its financial obligations.

For instance, a franchisor may require franchisees to contribute 25% of each month’s gross sales. But like other businesses, franchises require upfront and ongoing costs. You can view ongoing fees or royalties as the cost of doing business. Franchises may incur more predictable recurring costs, but they may be higher than with an original company.

Franchising may also require you to agree to a certain time commitment. You may need to keep a franchise location open for an agreed-upon time or until you can end the agreement with the franchisor. Sometimes a franchisor will require outgoing franchisees to find another person to take over the location. Be sure to check the agreement and any applicable laws.

Does Franchising Involve Establishing a Separate Company?

Yes, the franchisee definition means you’ll operate a separate entity under your franchising agreement. While you’ll use another organization’s trademarks and products, and services, franchisees establish separate entities. Legally, you could form a limited liability company that does business as the franchisor’s business name.

For example, McDonald’s franchises will be legally listed as individual companies doing business as (DBA) McDonald’s. Product distribution franchising agreements will also determine where a franchise gets its supplies from. They may come from a corporate-run warehouse that monitors each franchise location’s inventory.

These agreements may involve “selling” those supplies or products to every franchise store at cost. On paper, it’s the franchisee’s company that’s incurring the costs or buying the supplies from the corporate entity. However, the business format franchise contract may not dictate the prices at which a franchise location can resell those products.

Types of Franchises

Fast-food restaurants are what most people think of when they think of franchising. Yet, there are other options for entrepreneurs who want the benefits of using a successful business plan. Other franchise opportunities include:

• Stores that accept and ship packages, such as UPS and FedEx locations.
• Fleet locations that rent out moving trucks, including UHauls.
• Tax preparation services.
• Dog sitting and daycare services.
• Pet stores.

Depending on your interests and skill sets, one or more of these opportunities might be a better fit. It also depends on what kind of hours you prefer to work and your local market. For example, there may already be stiff competition for tax preparation services. But there’s room for a reliable pet sitting and boarding service.

The local labor market will also influence the suitability of a franchise opportunity. For example, you may have more trouble finding skilled tax preparers in a trade-dominated labor market. High average starting pay or salaries may also make it more challenging to recruit and retain entry-level staff. These are all considerations that should go into your evaluation and planning.

Can a Franchisee Design Their Own Marketing Materials?

Under some agreements, franchisees can design promotional materials and campaigns. However, you usually need to get approval before launch. A franchisor may have an official submission and approval process in place. Or, they may allow you to slightly modify corporate ads.

That said, you shouldn’t automatically assume you can do your own advertising if a franchise contract doesn’t spell out an approval process. Ask the question before you sign the paperwork, and keep the lines of communication open. It’s better to have to put a campaign aside or make tweaks than it is to jeopardize your agreement.

Final Thoughts

So, what is a franchisee? This knowledge tells you about the relationship dynamics between the two parties in the arrangement. Franchisees purchase the rights to use a franchisor’s trademarks, brand names, and products. The original business owner sells those rights in exchange for support and fees. 

But the definition of “what is a franchisee” goes beyond these surface-level roles and contracts. Essentially, you’re running your own company using someone else’s ideas and proven systems. A franchise is a good money-making opportunity for aspiring entrepreneurs who want to learn new skills.

However, it may not be the best arrangement for those who want complete creative control and decision-making abilities.