FLASH SALE! - "FINANCIAL MODELING COURSE BUNDLE AT 60% OFF" Enroll Now

Franchisor

Updated on April 25, 2024
Article byJyotsna Suthar
Edited byJyotsna Suthar
Reviewed byDheeraj Vaidya, CFA, FRM

Franchisor Meaning

A Franchisor, in business, refers to the entity that has initially started the business and grants the rights to another person to expand the enterprise. The sole objective of this role is to sell the ownership rights to franchisees in exchange for franchise fees and royalty charges.

Franchisor

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Franchisor (wallstreetmojo.com)

The relationship between franchisor and franchisee was already laid down in the mid-19th century. The Singer Sewing Machine Company was the first modern franchisor to share ownership rights in 1851. As a result, the profits derived from it are shared by both parties. 

Key Takeaways

  • Franchisor definition refers to a person or business who agrees to grant rights for operating their business to another entity (franchisee).
  • They allow the franchisee, per the franchise agreement, to conduct their business at a new location at an agreed initial fee and royalty.
  • The decision to provide financing solely depends on them. Also, the cost will vary based on the brand’s name and store type.
  • Some examples include McDonald’s, Starbucks, KFC, Dunkin’, Ben & Jerry’s, and other retail outlets. They either franchise their product or business format.

Franchisor Explained

A franchisor typically establishes the original business and envisions expanding its roots in other areas. In short, they grant rights and licenses for conducting operations to franchisees. Further, the latter purchases them, sets up stores, and operates them. They act like an advisor to franchisees. In return, the franchise owner receives an initial startup fee and royalties. It is a collaborative effort to gain profits and expand the core business. Examples include McDonald’s, KFC, Dunkin’, Starbucks, and other retail outlets. 

Usually, franchisors belong to large companies or established retail outlets. They allow the other party to operate a store with the help of their finance, support, and franchisor business model. In addition, they also provide enough training, hire staff, and market their products. Their only intention is to act as a mentor to the franchisee. In return, the profits behave as benefits.

A franchisor also has alternatives before entering the franchising business. They can either grant product distribution rights or through business format. In the former case, they allow the franchisee to sell products they manufacture. However, the franchisee cannot sell similar or competitor’s products. If they do so, the contract may turn void. Likewise, in a business format franchise, the franchisee receives products and services to run the business. It is most visible in the retail and hotel business.

This franchising business has existed for decades, but there are still high chances of duplication. Yet, firms try their best to establish their presence before competitors acquire the market share. A perfect example would be McDonald’s franchisor. They provide the product, menu, recipe, ingredients, and required staff across the various stores. However, restricting to one store may risk their presence and demand. And that’s where a firm turns into a franchisor.  

Roles And Responsibilities

Apart from financing, there are various roles and responsibilities of a franchisor. Let us look at them:

  1. Providing a Base Setup: The fundamental rule of a franchisor is to provide a franchise package to the other party. It is an essential requirement for any franchise business to exist. It means they must provide the necessary product or service, equipment, tools, and resources. The costs and need for franchisor financing are also essential. Otherwise, it will become difficult for franchisees to carry the business ahead. 
  2. Advertising and other Services: Besides the initial base, they are also responsible for product marketing. Some business owners may need more than the franchisee’s marketing rule. As a result, they handle the marketing and advertising department. Hence, the franchisee may also receive banners and an updated catalog as a part of this process. 
  3. Management of Franchise Locations: A business has a firm grip in specific locations, leading to a strong lead. However, they may selectively choose the store location before becoming one. For example, a McDonald’s franchisor may consider the local demand before setting up or shutting any store. 
  4. Hiring and Training Staff: Any franchise store needs to be completed with their personnel. Likewise, the right staff with proper training delivers the expected customer experience. Thus, the franchisor has to provide appropriate training to the staff. For example, Starbucks cannot franchise its business to a location where personnel cannot blend coffee. 
  5. Consultancy Services: In addition to the above roles, they also act as an advisor to the franchisee. They mentor the latter with franchisor business models, financing tips, and other issues. 
  6. Research and Development: Franchisors have to research their product and its updates consistently. Since demographics alter across regions, so do the preferences. Therefore, it is vital to research the products offered. 

Examples

Let us look at the examples of franchisors to understand the concept in a better way:

Example #1

Suppose an ice cream outlet, SweetNcool, is entering franchising. Till now, there are three stores within the town. Also, to match their increasing demand and presence, they are opening a new store. As per their research, this location is the epicenter for most demand. Thus, there are chances of breakeven. So, James agrees to be the franchisee for the retail outlet. In return, he pays $100k as an initial fee. 

SweetNchill will provide him with a staff of 20 employees. A group of five will handle departments (ice cream making, serving, and delivery). From the rest, one will be the manager, and others will maintain the store. Also, the franchisor will provide curated recipes and ingredients to maintain authenticity and taste. 

Example #2

N2GIVES exemplifies the role of a franchisor in addressing social issues beyond business operations. Established in 2016, it is committed to combating human trafficking by allocating two percent of its revenue annually to anti-trafficking efforts. By partnering with effective nonprofit organizations, the company channels resources toward ending modern-day slavery and supporting survivors.

Led by Rebecca Hixon, N2’s Director of Philanthropy, the organization’s mission to eradicate human trafficking underscores its dedication to making a positive global impact. The cyclical nature of their structure, driven by motivated team members and increased revenue, fuels their philanthropic initiatives, further reinforcing the company’s ethos. As a franchisor with over 800 publication franchises, The N2 Company’s success is intertwined with its commitment to social responsibility, epitomizing the symbiotic relationship between business growth and societal betterment.

How To Become?

Let us look at the steps for becoming a franchisor in the corporate business:

  1. Determine the Potential of the Business: Before entering the franchising business, it is crucial to determine the business potential. In other words, whether a business is ready and holds distinctive qualities to be a franchise. Also, if the firm has enough funds and time, the business can proceed with other steps. Otherwise, it may drive losses in the future.  
  2. Set up Pilot Operation: It acts as an essential step for becoming a franchisor. Firms can keep a test phase that involves a trial of this business. This move will monitor if the franchise business is viable and appropriate. Also, the franchisee will be a person who already knows the business better. In most cases, it is a current employee or a loyal customer. They may receive this opportunity at a reduced or nil cost compared to others. 
  3. Expert Consultation: Businesses can also consult their management and experts before commencing the business. Plus, setting up a franchise team in the initial stage is a must. They can hire a franchise salesperson, operations and training manager, support staff, and attorney. 
  4. Define the Agreement Terms: Once internal work is done, businesses can lay down their terms to the franchisee. In the agreement, they can discuss the financing cost, initial fee, royalty charges, and other terms. Thus, by its end, the business becomes a franchisor.  

Advantages And Disadvantages

Franchisor advantages are viable in the franchising business. However, there are certain disadvantages to it. Let us look at them:

AdvantagesDisadvantages
It creates expansion opportunities for the business.Many financing, documentation, and franchisor costs are involved during the franchising process.
It creates a substantial increase in the market share of their products.Even a slight dent by them can lead to failure, ultimately damaging the business’s goodwill.
Acting as a franchisor allows one to scale and customize their franchise agreement.There may be disagreements and miscommunication with the franchisee.
Regular flow of income from the franchise stores via initial fees and royalties.Not all profit share is enjoyed solely; it is evenly distributed.
There needs to be more employee supervision from their side. 
Rising awareness and product presence in new locations and among new customers. 

Franchisor vs Franchisee

Franchisors and franchisees have a strong relationship in franchising, yet they seem different. Let us look at the differences between them:

Key PointsFranchisorFranchisee
MeaningIt refers to the party or person granting rights and licenses to conduct business at a new location, fees, and terms.Franchisee, on the other hand, is a person who wishes to conduct someone else’s business at an agreed fee.
PurposeTo expand the business and create their presence in new locations.To operate an outlet of a famous brand and generate profits.
Franchise LocationThey only support in the initial stage by providing costs and financing.A franchisee is solely responsible for managing and operating the store.
RoleHere, they act as an entrepreneur, advisor, and mentor.They serve as a third-party manager. 
ResponsibilitiesThey have to manage the entire company or the business.Franchisees only support a single store.

Frequently Asked Questions (FAQs)

What do franchisees typically have to pay to the franchisor?

The basic fee structure of a franchisor includes franchise fees and royalties. Here, franchise fees are the initial amount to be paid by the franchisee. Later, they will use it to provide resources to them. However, it may vary across businesses and sectors.

Can a franchisor terminate a franchise agreement?

Both parties have the right to terminate the agreement on nonfulfillment of the terms. The franchisor can end it if the other party fails to comply with the terms or commits a mistake twice within 12 months. Likewise, the franchisee performs the same if the former fails to provide the mentioned resources and training.

Can a franchisee sue a franchisor?

A franchisee can sue the franchisor for misconduct or breach of agreement terms. However, there can be situations where a tribunal may declare a latter liable for acts of the franchisee.

How do franchisors make money?

Usually, they earn about 4-6% of gross sales, whereas the rest lies with the franchisee. The latter use it for store and staff maintenance. According to a report, the former makes an annual figure of $80,000 as pre-tax income.

This article has been a guide to Franchisor and its meaning. We compare it with franchisee, and explain its advantages, how to become one, role, & examples. You may also find some useful articles here –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *