Franchisee

A small business that operates under the trademark of a parent company (or franchisor)

What is a Franchisee?

A franchisee is a business that operates under an existing business’s trademarks. They purchase the right to use a parent company’s brands, material, and other knowledge to sell the same goods and operate under the same standard as the original business. Franchisees become independent operators and owners of franchises, which are stores that function the same way as the parent organization.

 

Franchisee

 

Franchises are commonly seen throughout many cities. Examples of businesses that have incorporated the franchise model include popular corporations such as McDonald’s, Subway, Burger King, and more.

 

Summary

  • A franchisee is a small business that operates under the trademark of a parent company, also known as the franchisor.
  • Throughout inception, the franchisee receives guidance, consultation, and support from the franchisor regarding internal operations, such as hiring, marketing, corporate strategy, and more.
  • In exchange for the guidance and the ability to operate under its name, the franchisee pays the franchisor a start-up cost, as well as a periodic payment based on a percentage of their gross revenues.

 

Understanding Franchises

Franchises occur for two reasons:

  • The business wishes to increase its market share.
  • The business wishes to increase its geographical presence at a lower cost.

 

Franchising a business is capable of achieving both objectives. The franchisor, who is the original owner of the business, can sell the right to other potential business owners to use its name and idea to operate their own business.

From a third-person perspective, the franchisee is the individual who buys into the franchisor’s existing business model and trademark to gain the right to sell the franchisor’s goods or services.

 

Who Enters Into a Franchise

Oftentimes, entrepreneurs with little experience tend to enter into a franchise for the following reasons:

  • The cost of opening a franchise is lower than initiating a new start-up; thus, there is less initial outlay that must be put upfront.
  • Franchisees receive the appropriate support and guidance from the franchisor to succeed.

 

The Relationship Between a Franchisee and Franchisor

Similar to a consultant and its clients, a franchisee and franchisor have a mentor-like relationship. The franchisor provides guidance and support throughout the operations of the franchisee’s business, including staffing, set-up, marketing, and sourcing matters.

In the beginning, the franchisor will assign the franchisee a specific location to set the shop up. The location will be an area where the industry that the business is operating in offers great potential to grow and succeed without the presence of large competition and other obstructions.

In exchange for the franchisor’s assistance and use of intellectual property, the franchisee must pay a start-up fee, as well as a periodic payment based on the percentage of their gross revenues to the franchisor.

 

How the Franchisee Must Operate

For alignment purposes, the franchisee must follow the business model to that of the franchisor. It is crucial to have consistent operations, culture, products, and services under the same brand name.

Furthermore, the franchisee is also responsible for growing the franchise name through marketing initiatives. However, it is important that all marketing campaigns comply with and are approved by the franchisor before being released publicly. Lastly, as a supervisor or manager of a franchisee, they must ensure all offerings are approved products and services sold by the franchisor and are under their brand name.

 

Example of a Franchise

An example of a franchised fast-food restaurant is KFC. In the 1950s, Colonel Sanders sold his fried chicken recipe to franchisees after being forced to shut down his own restaurant and motel. His first franchisee was Peter Harman, who owned a hamburger shop in Salt Lake City, Utah. Over the years, Sanders persuaded many other restaurant owners to add KFC to their menus.

Eventually, Sanders took his recipe around the country, and by 1963, he franchised over 600 outlets in the U.S. and Canada. Gradually, the business grew so large that Sanders was unable to handle it all. Thus, he sold his business to a group of investors in 1964.

Since then, KFC has become a well-established worldwide fast-food chain brand, specializing particularly in fried chicken.

 

Related Readings

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

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