What is a franchisee?

A franchisee is a small business owner who operates a franchise. The franchisee purchased the right to use the trademarks of an existing business, associated brands and other proprietary knowledge to market and sell the same brand and meet the same standards as the first business. Franchisees become independent owners and operators of third-party outlets called franchises.

Franchises are an extremely common way of doing business. In fact, it is difficult to drive more than a few blocks in most cities without seeing a franchised business. Examples of well-known franchise business models include McDonald’s (NYSE: MCD), Subway, United Parcel Service (NYSE: UPS) and H. & R. Block (NYSE: HRB). In the United States, there are franchise business opportunities in a wide variety of industries.

There are advantages and disadvantages to investing in an already successful business; As with any investment, study your options carefully before deciding to buy a franchise.

Understanding franchisees

When a company wants to gain more market share or increase its geographic presence at low cost, one solution could be to create a franchise for its product and brand. The franchisor is the original or existing business that sells the right to use their name and idea. The franchisee is the person who buys in the original business by purchasing the right to sell the goods or services of the franchisor according to the existing business model and brand.

Why become a franchisee?

Operating a franchise could be an ideal business for entrepreneurs with little experience because 1) the costs of opening a franchise are low compared to starting a business from scratch, so franchisees require very little capital to start; and 2) franchisees receive a lot of help because franchisors closely supervise their new franchisees.

Franchisee and franchisor relationship

The relationship between a franchisee and a franchisor is intrinsically a relationship of adviser and adviser. The franchisor provides ongoing advice and support regarding general business strategies such as hiring and training staff, setting up a shop, advertising their products or services, sourcing their supplies, etc. To begin with, the franchisor assigns the franchisee an exclusive location where no other franchise within the same underlying business is currently operating to prevent competition and ensure success.

In return for the franchisor’s advisory role, the use of intellectual property and experience, the franchisee generally pays start-up costs plus a continuous percentage of gross income to the franchisor.

Responsibilities of the franchisee

A franchisee must follow the proven business model that is already in place, as it helps to provide a consistent statement of operations across all businesses under the same brand. The franchisee is responsible for the growth of the franchise through the usual means of advertising and marketing in its exclusive operating area.

However, all marketing campaigns must comply with and be approved by the originating establishment before disclosing them to the public. As a franchise manager, the franchisee is expected to protect the brand name of the franchisor by offering only approved products and services that are linked to the brand name of the originating company.

Key points to remember

  • A franchisee is a small business owner who operates a franchise.
  • The franchisee pays fees to the franchisor for the right to use the company’s established success, trademarks and proprietary knowledge.
  • The franchisee receives ongoing advice and support from the franchisor.
  • The franchisee markets and sells the same brand and respects the same standards as the original business.

Example: McDonald’s has 34,410 franchisees

One company that has a global presence due to its franchises is the fast food giant, McDonald’s. McDonald’s was founded in 1940 by the McDonald brothers in San Bernardino, California. However, Ray Kroc opened the first official franchise for McDonald’s System, Inc. – a predecessor to McDonald’s Corp. current – in 1955 in Des Plaines, Illinois (a suburb of Chicago).

At the end of fiscal 2020, there were 37,000 McDonald’s restaurants in 119 countries around the world, of which 92.7% were franchised. Thus, the company has approximately 34,410 franchisees. The company’s long-term goal is for 95% of McDonald’s restaurants to be owned by franchisees.

McDonald’s owns land and buildings used by franchisees or obtains long-term leases for franchise sites. As part of the contractual agreement between the company and the franchisees, a franchisee provides part of the capital required by making an initial investment in equipment, seats, decoration and signs at the location that the company provide. For potential franchisees, McDonald’s requires an initial deposit of 40% (of the total cost) for a new restaurant or 25% (of the total cost) for an existing restaurant; and at least 25% of the deposit must be in cash.

The legendary success in the history of the McDonald’s franchise is in part the result of the company’s commitment to maintain consistent standards in its menu that resonate across its different channels. A Big Mac in Los Angeles should and has the same quality as a London. Franchisees manage their own pricing and personnel decisions while benefiting from McDonald’s brand equity and global experience.

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