The franchise business model lays out the guidelines for selling products or providing services. Before the business launches, the franchise owner has signed a franchise agreement, which is a legal contract.
The franchise agreement gives the franchise owner the rights to operate the business. Is it a slam dunk that the franchise business will be successful?
According to statistics from the Small Business Administration, a franchise business has better odds of success than a solo new business. But that’s only if the franchisor and franchisee understand their roles and stick to the system.
Both sides must be equally dedicated in order to be successful. There is no guarantee for success, even with a thriving, pre-established entity.
What is the Difference Between a Franchisee vs Franchisor?
Who’s who? According to the franchising definition, the franchisor is the person who started a successful business and decided to expand by selling clones of the original business. The franchisee is the person who purchases the franchise.
For example, Jane opens Kennel Suites, a unique dog boarding business. Each dog has its own suite, similar to a hotel room, with a private fenced area. Individual attention, and lots of it, is the focus of the business. Kennel Suites is hugely successful, as pet owners are thrilled their pets are getting such personal attention.
Jane decides her business model could operate successfully anywhere. She becomes a franchisor, and begins the process of finding and recruiting franchisees.
There is often confusion between the definitions of franchise and license. Keeping it simple, a license is a right to use a brand. The licensee pays a royalty fee to use a brand, and the licensee can also decide how to market and sell the brand.
The franchise is a legal relationship, specifically defined. It involves trademark logos but that is different than a license for a brand. And although it operates as an independent branch, the franchise must be run following established guidelines.
Franchisor Roles and Responsibilities
The franchisor is the person who has a successful business model, and is selling the right to use that model to another person or entity.
The franchisor has established the initial business system and now must establish the franchise system. What are the roles and responsibilities of the franchisor?
- Provide the FDD ( financial disclosure document). The franchisor should make this paperwork readily available to potential franchisees. The document includes information about profit and loss, business expenses and other costs. It should also include biographical and professional information about the seller, any information involving litigation or bankruptcy, and definition of fees. Fees may include initial fees and ongoing fees.
- Vetting Franchisees. One of the biggest mistakes made by a franchisor is to decide to sell the franchise because the franchisee has enough money. For the franchise to be successful going forward, yes, the franchisee must have sufficient funds. But the franchisee also must have a great work ethic, skill in hiring and training staff, and experience running a business.
- Site Selection. The franchisor knows why the business was successful in a certain demographic. The franchisor wants to choose a site that lends itself to success for franchisees. The sites should be positioned so that there is no competition between franchisees. For example, through research, Jane with Kennel Suites knows future Kennel Suites should be located in upscale urban areas for the best chance to thrive. She keeps that in mind as she makes decisions about expansion, not just in her state but nationally.
- Training and Support. For franchising to work, training and support must be ongoing. It can be offered in a variety of ways, taking the shape of financial support, administrative services, and use of established marketing and advertising. The franchisee must know upfront, according to the contract between the franchisor and franchisee, if there will be fees associated with training and support.
Franchisee Roles and Responsibilities
The franchisee definition is the person or entity which purchases the franchise from the franchisor.
The franchisee is responsible for operating the business and making a profit. Franchisees by their contractual agreements must run the business system in a prescribed manner, or the franchise system won’t work.
The franchisee’s responsibilities include:
- Protecting the Franchise Brand. The franchisees must operate the business in such a way that the franchise reputation is upheld. One of the downsides to the system is the actions of one person can affect many others.
- Building the Business. Franchising isn’t a magic carpet ride to business success. As with growing any business, long hours, frustrations, setbacks and financial struggles are part of the game. But one of the pros of franchising is that you won’t be in it alone. Franchisors have already charted your path. Along with the right to operate the business is the right to get assistance as needed.
- Hire and Train Employees. Franchisors have been down this road and they know how important this process is to the success of the business. The franchising business model should include guidelines for the process of hiring and maintaining employees, as well as an employee handbook. It’s a great benefit to have a preestablished employee handbook, already approved by someone’s human resources and legal departments.
- Advertising and Marketing – Franchisors most often provide these materials, as well as the rights to use them. There may be a percentage fee associated with advertising and marketing. There may also be restrictions on how these materials may be used.
Becoming part of franchising isn’t for everyone. But if you like the answer to “What is a Franchise?” – purchasing an entity with a proven track record and making it work for you – then getting involved in franchising may be the perfect fit for you.
One of the most important aspects of franchising is the “vetting” of each other. Both sides will be making a significant financial outlay. Before signing any contract, an investor or franchisor should enlist the services of an attorney or consultant skilled in franchising.