What Is a Franchisee? A franchisee is an independent business owner who runs a store or location using an established brand’s name and business model. The franchisee buys the right to use the franchisor’s trademarks, products, and operational methods to sell goods or services while maintaining the same quality and standards as the franchisor.

Key Points to Know

• A franchisee is a business owner licensed to operate a branch of a well-known company.
• They pay a fee to the franchisor for the right to sell its products and use its branding and operational system.
• The franchisor provides training, marketing support, and operational guidance.
• Franchisees must follow the franchisor’s business model and maintain brand standards.

Understanding Franchisees A franchisee operates under an existing company’s name by purchasing the rights to use its brand, products, and trademarks. The company that grants these rights is called the franchisor.

Many businesses expand through franchising because it allows them to grow their brand without the high costs of opening new locations themselves. Franchises exist in various industries, from food and retail to fitness and home services. In most cities, it’s common to see multiple franchise locations within a short distance.

Franchisees usually pay an upfront franchise fee when signing the contract. They may also need to meet certain financial requirements, such as a minimum investment amount or net worth. After starting the business, franchisees continue paying fees and royalties. A 2023 report from Franchise Business Review found that the average franchisee earns about $102,910 per year.

How to Become a Franchisee Owning a franchise can be an exciting and rewarding opportunity, especially since some of the groundwork is already done. If you’re interested in starting a franchise, here are some steps to follow:

1. Research different franchises. Think about the type of business you want to operate. Narrow your options to a few that interest you and are available in your area.
2. Understand financial requirements. Check the costs of each franchise and make sure you can afford the initial investment and ongoing fees.
3. Talk to current franchisees. They can provide insights into the benefits and challenges of running the business and help you understand expectations and costs.
4. Create a business plan. This will help you and the franchisor assess your financial projections and goals.
5. Review and sign the agreement. Make sure you understand your responsibilities before signing. You may want a lawyer to review the contract.
6. Set up your business entity. Most franchisees register as a Limited Liability Company (LLC) or corporation.
7. Choose a location. The franchisor will usually guide you in selecting an appropriate site.
8. Hire employees, market your business, and start operations.

The Relationship Between Franchisees and Franchisors The franchisee-franchisor relationship is built on guidance and support. The franchisor helps with training, staffing, advertising, and sourcing supplies.

Franchise agreements typically include exclusive territories, meaning franchisees won’t compete directly with other locations of the same brand nearby. In exchange for franchise rights, franchisees pay ongoing royalties or licensing fees.

Franchisee Responsibilities A franchisee must follow the established business model, including location setup, products, and branding. This ensures consistency across all locations.

Franchisees are responsible for local advertising and marketing, but all campaigns must be approved by the franchisor. They must also maintain brand integrity by offering only approved products and services.

Pros and Cons of Being a Franchisee Pros:

• Lower startup costs than starting a business from scratch.
• Immediate brand recognition and built-in customer base.
• Access to a proven business model, supply chain, and marketing support.
• Ongoing guidance and support from the franchisor.

Cons:

• High initial fees and financial requirements.
• Limited control over business decisions.
• Ongoing fees and royalties reduce profits.
• Brand reputation risks can impact the business.

Examples of Franchisees Popular franchises include McDonald’s, Subway, UPS, and H&R Block. McDonald’s, for example, has over 38,000 locations in more than 100 countries, with 93% of them owned by independent franchisees.

The McDonald’s franchise model is well-structured. The company either owns the land and buildings or secures long-term leases for franchise locations. It requires franchisees to have at least $500,000 in personal, non-borrowed funds. While franchisees manage staffing and local pricing, they must follow strict brand standards.

Frequently Asked Questions

Does a Franchisee Own the Business? Yes, franchisees own their businesses, but they must follow the franchisor’s guidelines and use only approved products and services.

Is a Franchisee the Same as a Franchisor? No, the franchisor owns the brand, trademarks, and business model, while the franchisee buys the right to operate a location under that brand.

Can a Franchisee Be Removed? Yes, if a franchisee violates franchise rules, such as failing to meet health and safety standards, the franchisor can terminate the agreement.

The Bottom Line Franchising continues to evolve, with traditional models like McDonald’s and emerging opportunities in service industries like home healthcare and tax preparation. While franchising can be a great opportunity for entrepreneurs, it is best suited for those who prefer following a proven system rather than creating a business from scratch.