Franchisee Definition - Investopedia

A franchisee is a small-business owner who operates a franchise. · The franchisee pays a fee to the franchisor for the right to use the business's already- ... TableofContents Expand TableofContents WhatIsFranchisee? UnderstandingFranchises Benefits Responsibilities Example:McDonald's FranchiseeFAQs Business TypesofCorporations WhatIsFranchisee? Afranchiseeisanindependentsmallbusinessownerwhooperatesathird-partyretailoutletcalledafranchise.Indoingso,thefranchiseehaspurchasedtherighttouseanexistingbusiness'strademarks,associatedbrands,andotherproprietaryknowledgetomarketandsellthesamebrand,andupholdthesamestandardsasthefirstbusiness. KeyTakeaways Afranchiseeisasmall-businessownerwhooperatesafranchise.Thefranchiseepaysafeetothefranchisorfortherighttousethebusiness'salready-establishedsuccess,trademarks,andproprietaryknowledge.Thefranchiseereceivescontinuousguidanceandsupportfromthefranchisor.Thefranchiseemarketsandsellsthesamebrand,andupholdsthesamestandardsastheoriginalbusiness. UnderstandingFranchises Franchisesareanextremelycommonwayofdoingbusiness.Infact,itishardtodrivemorethanafewblocksinmostcitieswithoutseeingafranchisebusiness.Examplesofwell-knownfranchisebusinessmodelsincludeMcDonald's(NYSE:MCD),Subway,UnitedParcelService(NYSE:UPS),andH&RBlock(NYSE:HRB).IntheUnitedStates,therearefranchisebusinessopportunitiesavailableacrossawidevarietyofindustries. Whenabusinesswantstogarnermoremarketshareorincreaseitsgeographicalpresenceatalowcost,onesolutioncouldbetocreateafranchiseforitsproductandbrandname.Thefranchisoristheoriginalorexistingbusinessthatsellstherighttouseitsnameandidea.Thefranchiseeistheindividualwhobuysintotheoriginalcompanybypurchasingtherighttosellthefranchisor’sgoodsorservicesundertheexistingbusinessmodelandtrademark. Therelationshipbetweenafranchiseeandfranchisorisinherentlyoneofadviseeandadvisor.Thefranchisorprovidescontinualguidanceandsupportconcerninggeneralbusinessstrategiessuchashiringandtrainingstaff,settingupshop,advertisingitsproductsorservices,sourcingitssupply,andsoon. Tostart,thefranchisorassignsthefranchiseeanexclusivelocationwherenootherfranchiseswithinthesameunderlyingbusinesscurrentlyoperateinordertopreventcompetitionandhelpensuresuccess.Inreturnforthefranchisor'sadvisoryrole,useofintellectualproperty,andexperiencethefranchiseegenerallypaysastartupfeeplusanongoingpercentageofgrossrevenuestothefranchisor. Therearebenefitsanddrawbackstoinvestinginanalreadysuccessfulbusiness;aswithanyinvestment,researchyouroptionsthoroughlybeforeyoudecidetopurchaseafranchise. FranchiseeBenefits Operatingafranchisecouldbeanidealventureforsomeentrepreneurswithlittleexperiencebecause: Thecostsofopeningafranchiseareoftenlowercomparedtostartingacompanyfromthegroundup,sofranchiseesrequireverylittlecapitaltostart; Consumersmayalreadyhavebrandrecognitionforthefranchiseandbenefitfromtheiradvertisingcampaigns;and Franchiseestypicallygetalotofhelp,asfranchisorswilltendtosupervisetheirnewfranchiseesclosely. FranchiseeResponsibilities Afranchiseemustfollowtheprovenbusinessmodelthatisalreadyinplace,asithelpstoprovideaconsistentstateofoperationswithinallcompaniesunderthesamebrandname.Thefranchiseeisresponsibleforgrowingthefranchiseviatheusualmeansofadvertisingandmarketingwithinitsexclusiveareaofoperation. However,allmarketingcampaignsmustcomplywithandbeapprovedbytheoriginalestablishmentbeforereleasingthemtothepublic.Asthemanagerofthefranchise,thefranchiseeisexpectedtoprotectthebrandnameofthefranchisorbyofferingonlyapprovedproductsandservicesthatarelinkedtothebrandnameoftheoriginalcompany. FranchiseeExample:McDonald's Acompanythathasaglobalpresencebecauseofitsfranchisesisthefast-foodbehemoth,McDonald’s.McDonald’swasfoundedin1940bytheMcDonaldbrothersinSanBernardino,California.However,RayKrocopenedthefirstofficialfranchisefortheMcDonald’sSystem,Inc.—apredecessoroftoday'sMcDonald’sCorp.(MCD)—in1955inDesPlaines,Illinois(asuburbofChicago). Atfiscalyear-end2020,therewere39,198McDonald'srestaurantsin119countriesaroundtheworld,93.17%ofwhichwerefranchised.So,thecompanyhas36,521franchisees.Thecompany’slong-termgoalisfor95%ofMcDonald’srestaurantstobeownedbyfranchisees. McDonald’seitherownsthelandandbuildingsusedbythefranchiseesorsecureslong-termleasesforthefranchisedsites.Aspartofthecontractualagreementwiththecompanythefranchiseeprovidesaportionofthecapitalrequiredbymakinganinitialinvestmentintheequipment,seating,décor,andsignsinthelocationthatthecompanywillprovide.Forwould-befranchisees,McDonald'srequiresaninitialdownpaymentof25%(ofthetotalcost)forthepurchaseofanexistingrestaurant;andatleast25%ofthedownpaymentmustbeincash. ThelegendarysuccessoftheMcDonald'sfranchisestoryispartlyaresultofthecompany'scommitmenttomaintainingconsistentstandardsinitsmenuthatresonateacrossitsvariouschains.ABigMacinLosAngelesshouldanddoeshavethesamequalityasoneinLondon.FranchiseesmanagetheirownpricingdecisionsandstaffingmatterswhilebenefitingfromthebrandequityandglobalexperienceofMcDonald’s. DoesaFranchiseeOwnaBusiness? Yes,afranchiseeisconsideredabusinessowner,althoughthetypeofbusinesstheyownisafranchise.Thiscanlimitthescopeandautonomyofwhatthebusinessownerisallowedtodo,perthefranchiseagreement.Forinstance,aMcDonald'sfranchiseecannotsellBurgerKingitemsandmustusetheofficialMcDonald'slogoandbranding. IsaFranchiseetheSameasaFranchisor? No,thefranchisoristheentitythatownstheintellectualproperty,patents,andtrademarksofthebrandorbusinessbeingfranchised.Afranchiseebuystherightsandlicensestooperatealocationofthefranchisor. CanaFranchiseeBeFiredorRemoved? Yes,ifthefranchiseebreaksthetermsorcovenantsinthefranchiseagreementtheymaybeterminatedwithcause.Aterminationthatisseenasnotforcausecanbelitigatedaswrongfulterminationofthefranchiseincourt. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. McDonald's."OurHistory."AccessedNov.7,2021. McDonald's."2020AnnualReport,"Page3.AccessedNov.7,2021. McDonald's."YourPathtobecomingaMcDonald'sFranchisee,"Page24.AccessedNov.7,2021 CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedTerms IntellectualPropertyDefinition Intellectualpropertyisasetofintangiblesownedandlegallyprotectedbyacompanyfromoutsideuseorimplementationwithoutconsent. more FranchisorDefinition Afranchisorsellstherighttouseitsbrandandexpertisetoonewhowillopenanotherbranchofthebusinesstosellthesameproductsorservices. more UnderstandingHowaFranchiseWorks Afranchiseisabusinesswherebytheownerlicensesitsoperations—alongwithitsproducts,branding,andknowledge—inexchangeforafranchisefee. more WhatIsaRoyalty?HowPaymentsWorkandTypesofRoyalties Royaltiesarepaymentstoanownerforusinganassetorproperty,suchaspatents,copyrightedworks,ornaturalresources.Learnhowroyaltieswork. more FranchiseDisclosureDocument(FDD) Thefranchisedisclosuredocument(FDD)isalegalformthatmustbegiventoanyoneplanningtobuyaU.S.franchise. more WhatisaBusinessModelwithTypesandExamples Abusinessmodelisacompany'sprofit-makingplanwhichdefinestheproductsorservicesitwillsell,itstargetmarket,andanyexpectedcosts. more PartnerLinks RelatedArticles CompanyProfiles HowMcDonald'sMakesMoney:MonetizingtheDemandforFastFood HowtoStartaBusiness TheCostofBuyingaSubwayFranchise HowtoStartaBusiness SharetheWealthWithFranchises HowtoStartaBusiness IsBuyingaFranchiseWise? Tools WhichBusinessModelIsBest?DependsontheIndustry TopStocks McDonald’svs.BurgerKing:What'stheDifference?