franchisee vs. franchisor

Franchisee vs. Franchisor: Breaking Down the Differences

If you’re interested in getting into the world of franchising, you’re going to need to know the lingo. This includes the difference between franchisee and franchisor.

Keep reading to learn more about each of these roles, how they differ, and what to expect from a franchise disclosure agreement (FDD).

Quick Takeaways

  • A franchisee purchases a successful franchise from an established brand. They must follow specific guidelines and standards but will otherwise run their branch independently.
  • A franchisor sells branches of their successful business for a fee to franchisors as long as they follow the specified terms and conditions.
  • As outlined in an FDD, the franchisee pays various franchise fees upfront and for the duration of ownership to acquire the legal right to promote and sell the franchisor’s products or services.
  • Franchisees must adhere to a designated business model to ensure continuity of service across all franchise locations.

Franchisee vs. Franchisor: What’s the Difference?

Here’s a quick look at the key differences between a franchisor and a franchisee.

  • Franchisee: A person who purchases a successful franchise from a business owner. While the franchisee will run their branch or branches somewhat independently, they must still follow the guidelines and standards set forth by the franchise owner.
  • Franchisor: A person who started a business that became so successful that they decided to allow others to replicate it by opening up their own locations (franchises) for a fee. The franchisor outlines a business model all franchisees must follow.

Franchisee Roles and Duties

A franchisee is a person or entity that purchases a franchise from a business owner.

Here are the core responsibilities of a franchisee.

Handling all Financial Responsibilities

Franchisees must have their own funding before considering buying a franchise. This includes the initial franchise fee and other expenses incurred in building and managing the company. They will also pay franchise royalty fees based on revenue.

Once a person decides to purchase a franchise, the arrangement will be outlined in a franchise agreement and FDD that is reviewed by the franchisor and franchisee.

Upholding the Franchising Business Model Standards

While it will be a franchisee’s own business to some extent, they must follow the franchisor’s business model to ensure they uphold the brand’s reputation and standards.

Franchisees, as representatives of the franchisor, have an ongoing obligation to safeguard the franchisor’s overall brand image by avoiding any actions that might cause public scandal.

Franchisees will participate in mandatory training sessions, where they will learn how to effectively hire, train, and retain employees for each franchise location as well.

Handling Marketing and Advertising

While the franchisor often provides marketing and advertising materials, the franchisee may pay a fee for them. Depending on the agreement, franchisees may be expected to contribute to the brand’s overall advertising, marketing, and promotional budgets in order to generate buzz about the company’s offerings.

Before any advertising campaigns can go live, they must first be reviewed and authorized by the franchisor.

Turning a Profit

Franchisees, with the help of the franchisor, are tasked with generating revenue and expanding their customer base in accordance with the brand’s established standards.

Franchisees are financially accountable to the franchisor for producing sales and growing a customer base that meets or exceeds the brand’s predetermined success metrics.

Producing Financial Reports

The franchisee will typically be tasked with providing regular financial reporting on all business operations so that the brand may monitor the performance of individual units and their profitability.

Franchisor Roles and Duties

A franchisor is an individual or business that allows another to use its trademark, intellectual property, and acumen to set up a branch of its business for a fee.

Here are the responsibilities of a franchisor.

Vetting Franchisees

A franchisor must properly vet franchisees to ensure the continued success of the franchise system.

While having enough money to buy a franchise is crucial, work ethic, business skills, people management skills, and financial savvy are also important.

A thorough vetting process will help ensure both parties stay profitable for the duration of the franchisor and franchisee relationship.

Covering Advertising Costs

Another key role of a franchisor is supporting its brand’s marketing efforts, including promoting the brand, protecting trademarks, and implementing quality standards for their goods and/or services. 

Franchisors often provide all franchisees with pre-approved, vetted marketing materials to ensure brand consistency across platforms and locations.

Supporting Franchisees

A franchisor acts as a mentor to the franchisee by sharing their knowledge, strategies, and resources. In most cases, credible franchises will provide initial and ongoing support and training to their franchisees.

Help is provided in various ways, both technically and in terms of day-to-day operations. Services like inventory management software and promotional materials are examples of what a franchise business might provide to assist and assure the long-term success of all branches.

Training Employees and Monitoring Performance

Franchisors help franchisees with training staff by providing them with training materials and ongoing support.

The franchisor monitors franchisees to ensure they are adhering to company rules and regulations and will need to take action if any start to stray.

Site Selection

A key part of a franchisor’s role is to plan the growth of the business through demographic market research and analysis.

Knowing the best places to offer franchise opportunities helps ensure franchisors set franchisees up for success.

What Is a Franchise Agreement?

difference between franchisee and franchisor

In a franchise agreement, the franchisor agrees to let the franchisee use their proven business model. Both the franchisor and franchisee must agree to the terms before the deal is valid.

The franchise agreement will also contain a franchise disclosure document, which outlines the fees the franchisee will pay, either in a lump sum or through payments, legal terms, and other conditions.

The two parties will handle payments according to the schedule and terms outlined in the franchise agreement. The franchisee may have to pay the franchisor periodically (e.g., monthly, quarterly, or annually) or in a lump sum.

Payments to the franchisor may include but are not limited to the initial franchising fee, ongoing royalties on sales, rent, advertising assistance, equipment and supplies, and any combination thereof.

Is Becoming a Franchisee a Good Idea?

A franchisor owns their business model, and the franchisee pays to use it. This is why investing in a franchise can help you bypass the time-consuming process of developing a business strategy, establishing a brand identity, and performing market research.

Skip the product development phase by repackaging an existing product that is already a successful brand created by an experienced entrepreneur.

But before you sign on the dotted line, it’s important to conduct an in-depth investigation of the established business. Read the franchise’s marketing materials and disclosure documents in detail about the ongoing expenses.

If possible, you should also attend a franchise discovery day to learn everything possible about the opportunity. While you’re there, ask what the franchisor would do if things start going south. How will they help struggling franchisees turn things around?

Do Your Homework

Ultimately, deciding on the right business model varies from person to person. It’s your duty to evaluate your current financial situation and future goals before you make a choice.

Explore various franchise opportunities to decide what’s right for you.

Working with a franchise business system is the best option for some people, but that doesn’t mean franchising is the only business model you can subscribe to.

Research all your options before you make a choice.

The Wolf

The Wolf of Franchises is an industry insider who’s sharing the secret sauce of how lucrative the franchising industry can be. He offers expert insight to help both new and existing franchise owners reach success.