Franchisors operate a business by selling franchise opportunities to franchisees. After signing an agreement, a franchisee gains the rights to run a franchise location with certain regulations and obligations. The franchisee pays a franchisor a one-time fee and an ongoing royalty fee.
There is a significant difference between a franchisor and franchisee. When it comes to opening up this type of business, it’s vital to understand this market in-depth. At Rodney R. Hatter & Associates, our experts in franchise law cater to those in the restaurant business. Here’s our guide to franchisors and franchisees.
What is Franchising?
Franchising is a business arrangement where the owner provides the license and right to utilize other companies’ organizations, locations, trademarks, and systems. The individual or company will pay the fees to the company that owns the franchise as well as a royalty payment to use the intellectual property.
Franchisor vs. Franchisee?
The main difference between a franchisor and franchisee is that a franchisor owns the brand, trademark, and system of the company. This is the person who started the whole business, brand, and market it. They provide the terms and regulations as well as licensing that the franchisee can use. The franchisee will have to pay a certain fee and royalty to obtain the trademark and branding to operate the business.
What Does Franchisor Do?
A franchisor is an entrepreneur who has created a successful and established business. He or she has laid out all the groundwork and has proven to be a valuable asset to the company.
A franchisor undergoes trial and error as well as meticulous research in order to obtain the most valuable asset for their business–a registered trademark. It takes a lot of time and effort to establish a highly recognized brand name. Additionally, it requires obtaining the federal rights to that mark.
A franchisor has created a way of conducting the business to obtain reliable results. With this in mind, the franchisor is responsible for the business model that successfully deals with how customers and clients deliver products and services.
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In order to become a franchisor, you must have created a business model that proves your value to the business as someone who drives profit. Because of that, consumers will go out of their way to recognize your brand and seek out your products or services.
Training and Support
Responsibilities of a franchisor includes providing training and ongoing support to a franchisee. This ensures that the franchisee can learn and succeed under the guidance of an experienced entrepreneur.
What Does a Franchisee Do?
Manage Franchise Location
The franchisee would have to take on the franchisor’s business model by training other employees and establishing the business in a specific location. The franchisee uses the franchisor’s existing framework for how the business works and what makes it successful. They can also control the day by day operation.
Paying the fees
The franchisee will have to pay a franchise fee to obtain the right to establish the business in a specific location. They would also have to pay a percentage of expenses for advertising costs and gross revenues.
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What Are The Advantages of Franchising for Franchisors?
The franchisor no longer maintains the responsibility of the day-to-day operations of running a business. They obtain their money through franchise fees, which the franchisee pays to gain access to the brand-name and central system.
With that in mind, the franchisor can make a significant amount of income through licensing their business plan and brand name to independent franchisees.
What Are the Advantages of Franchising for Franchisees?
There are various advantages that franchising provides for franchisees. The franchisee uses established trademarks and brandings, allowing them to bypass all the mistakes and challenges of starting a business from scratch.
In addition to that, customers are most likely to be loyal and easy to obtain primarily if the business is well-known and has a recognizable brand.
The franchisor holds the responsibility for product research and development as well as marketing, advertising campaign, and vendor negotiation. This takes the stress off of the franchisee, who can now direct their focus on training employees and serving customers.
The majority of franchisors offer financial support, relieving the franchisee from the duty of obtaining funds from external sources.
Another advantage that franchising gives franchisees is the opportunity to buy a business with little to no expertise. For example, an individual may not have any medical knowledge or background, but they can now purchase a doctor’s office provided that they hire a physician to run it. The franchisor has already made sure everything is up to regulation and all the individual has to do is maintain it.
Find out which restaurant franchises chose Rodney R. Hatter & Associates for legal services.
Are There any Disadvantages For Franchisors?
It may look like the franchisor benefits more, but there are some disadvantages. For example, a franchisee who fails to meet the company standard or accidentally create a public scandal can be detrimental to the entire brand.
For example, at Starbucks, a franchisee manager was accused of racial discrimination after ordering the removal of two African-American individuals. This has led to a racial discrimination case that has caused Starbucks to shut down the establishments for a whole day to train their employees on race and discrimination, and how it’s not allowed in the company. Because of that, Starbucks has lost over $12 million in sales.
That means training and supporting franchisees becomes a challenging business. This can distract the franchisor from their overall brand vision, which might include innovative product development, staying on top of the competitors, and improving on marketing modalities.
Plus, franchisees might eventually end the relationship with a franchise but continue to use intellectual properties that violate the terms and agreement. This can cause a significant legal headache for the franchisor.
Because some franchisees have never worked in the business industry before, so it can be challenging for the franchisor to train them effectively. This can affect the success of the franchise as well as compliance with the industry standards.
How Do You Become a Franchisor?
Franchising your business is a proven route to more profit, but the process of becoming a franchisor is quite long and costly. The International Franchise Association stated that of the 105 companies that started selling franchises in 2008, more than 40 had not reported the sale of their first unit by the end of 2009. But if you are able to go through all the effort and legal paperwork, there’s a lot of moolah to be made.
The first step is to evaluate your business and see if it’s ready for such a dramatic shift. Consider your concept. Most successful franchise companies offer something familiar and provenly popular — but with their own twist. It’s a concept that should also appeal to investors and prospective franchisees, meaning it should be something you can replicate.
If this all sounds good, it’s time to look closely at your financials, gather market research, and prepare for the big changes ahead. Keep in mind it can cost about $100,000 or more to get a franchise going.
Then it’s time to learn the legal requirements. You must register a Franchise Disclosure Document with the Federal Trade Commission, detailing your business’ audited financial statements, an operating manual for franchisees, and more. It’s also important to keep in mind that states often have their own rules for selling franchises. If you’re looking to learn more about the legal process and the laws and regulations surrounding franchises in California and beyond, contact Rodney R. Hatter & Associates today.
How Do You Become a Franchisee?
Begin by looking up available franchise options in your area (or in the area you’re looking to do business in). Choose the type of franchise you also want to open or invest in, since all industries come with their own unique requirements, experience, and expertise.
It’s important to examine the terms, conditions, and requirements for each franchise opportunity that’s caught your attention. You’ll need to find out what the franchise fee and other expenses will be upon getting involved with the franchise. You may also want to look into the company’s reputation. Check the Better Business Bureau and the American Association of Franchisees and Dealers.
Then do some more research of your own. What is the demand for this type of business in the area you’re looking to open up in? What is the company’s usual profit per location? Franchises will often do research on locations as well, choosing places based on community surveys and data to pick areas where they believe the business will be successful. See if any of those locations appeal to you.
Submit an inquiry to become a franchise owner with the company. You will receive an application, as well as a request for available funds. They’ll also send information about the opportunity and location. Fill out the application, providing proper details and proof that you have funds for the initial investment.
If you’re selected, that leads to a process all its own. But you’ll need to be prepared for a grand opening, including marketing and inventory.
Take Home Message
The franchisees and franchisors each face advantages and disadvantages when it comes to running a business. Even though franchisors have created and established the business with the brand and trademark, they are still responsible for ensuring that the franchisees are knowledgeable about running the business.
They are also responsible for creating new products and services as well as marketing. Fortunately, they have limited liability and responsibility when operating the stores. They can also obtain their profit through franchise fees and royalty payments.
Franchisees, on the other hand, do not have to go through the challenges and obstacles of starting a business. They don’t have to waste time creating products and services as well as marketing. They focus on training employees, making sure that the customers are satisfied, and that the store is running smoothly and efficiently.
With all this in mind, it requires both the franchisor and franchisees to have the passion and drive to ensure that the business runs smoothly. Find out more about how our services at Rodney R. Hatter & Associates can be of service to you.