Franchisee vs Franchisor: What is the Difference Between Them?

Franchisee vs franchisor

McDonald’s. 7-Eleven. KFC. Subway. These and many other household names are franchises.

They bring in good money, too. In 2020 alone, U.S. franchises had a total economic output of $670 billion.

However, don’t rush to set up a franchise just yet. You must first learn about the franchisee vs franchisor difference.

Let’s take a look at what each of these roles entails and how the franchise relationship works.

What Is the Difference Between Franchisee and Franchisor?

The main difference between franchisor and franchisee is that a franchisor owns a licensed business model, whereas a franchisee pays the franchisor to use that business model – including the brand, products, services, and processes – at a specific location and for a set period of time.

The business that is formed and run by the franchisee is called a franchise. The franchisee-franchisor relationship is governed by a legal document known as a franchise agreement.

These terms – franchise, franchisee, franchisor – sound and read similar and can be confusing for a lot of people. The sections below explore this topic in more depth and provide a detailed franchisor and franchisee definition. 

What Is a Franchisor?

So, who is the franchisor, exactly? A franchisor is an established entrepreneur or company with a licensed business model. They provide a well-developed (and well-earning) brand that franchisees can buy and use for a certain period of time. This includes:

  • The brand name 
  • Any trademarks and associated brands 
  • The franchisor’s business model
  • Any goods and/or services provided by the business
  • The franchisor’s industry experience 
  • The franchisor’s proprietary market knowledge 
  • Training materials
  • Marketing materials

In exchange, the franchisor charges the franchisee various fees that normally total a little under 10% of the gross revenue of the franchise. 

In addition to collecting fees, the franchisor gets to increase their market share and expand the geographical presence of their brand at a relatively low cost. They are also able to share the associated risks with the franchisee.

Franchisor Definition

To recap, what does franchisor mean? 

A franchisor owns and leases a licensed business model to a third party known as the franchisee. In exchange for a fee, the franchisor allows the franchisee to temporarily use their business model at a specific location or geographical area.

What Is the Role of the Franchisor When a Franchise Is Purchased? 

There is a lot more to being a franchisor than leasing a business license and collecting franchise fees. The specifics of the franchisor role will vary from case to case based on the business model and franchise agreement, but common responsibilities include:

  • Letting the franchisee sell products and/or provide services under the franchisor’s brand
  • Offering initial training on the business model leading up to the opening day, including day-to-day operations, administration, on-site training, marketing and advertising, hiring and training staff, sourcing supply, and more
  • Offering continuous training and support throughout the term of the franchise agreement 
  • Providing lists of vetted vendors and suppliers of equipment, materials, and goods
  • Providing access to helpful tools, such as marketing materials, business software, inventory management systems, and more

What Is a Franchisee? 

We now know who the franchisor is, but who is the franchisee? 

The franchisee buys the franchisor’s business license and, in exchange, is allowed to run their own business under the franchisor’s brand for a set period and within a specified geographical area. 

Franchisees are often small business owners operating third-party retail outlets. Under the franchise agreement, they get to set up shop at an exclusive location where there are no other franchises within the same brand. This prevents competition and helps guarantee the future success of the new franchise. 

All of that makes it possible to start a business from the ground up with little capital and at a low cost while benefiting from the recognition and marketing of the original brand. A franchisee also receives continued advice, training, and support from the franchisor. 

Franchisee Definition

To summarize the franchisee meaning, a franchisee is an individual or a company that buys the right to sell the goods or services of another business (called a franchisor) under its original business model and trademark, at a specific location and for a set period of time.

What Are the Responsibilities of a Franchisee? 

The franchisee is responsible for:

  • Learning about the franchisor’s business, both before opening the franchise and throughout the term of the agreement
  • Closely following the franchisor’s business model, including brand usage guidelines, operational practices and procedures, marketing strategy, and more
  • Upholding the same standards as the franchisor and protecting the original brand’s reputation
  • Developing the franchise in the set location
  • Advertising and marketing the franchise within its area of operation
  • Offering approved products and services only
  • Covering the costs to establish and run the business

A franchisee must also make the following payments to the franchisor:

  • A royalty fee for the use of the trademark
  • Compensation for any training and advisory services
  • A percentage of the franchise sales
  • A marketing fee 
  • A disclosure fee to cover the franchisor’s legal and administrative costs of providing regulatory documentation

Franchisee vs Franchisor Comparison Chart 

What is a franchisor and franchisee relationship? The chart below provides a good visual summary of their respective roles and responsibilities.

ComparisonFranchiseeFranchisor
Owns original brand and business modelNoYes
Develops overall business strategyNoYes
Provides training and adviceNoYes
Receives franchise feesNoYes
Manages franchise locationYesNo
Covers costs to set up and run the franchiseYesNo
Keeps sales proceedsYesNo

Franchisee vs Franchisor Example 

To better illustrate the franchisor franchisee relationship, let’s consider a real-life example.

Subway is one of the most successful franchises in Florida. The company was founded in 1974 and has since expanded to 37,000 facilities globally, more than 700 of which are based in Florida.

Opening a Subway is much more affordable than a McDonald’s, for instance. To start a Subway franchise in Florida, you need:

  • Minimum net worth: $80,000
  • Liquid assets/cash: $30,000 to $90,000 
  • Initial franchise fee: $15,000 
  • Royalty fee: 8% of gross revenue
  • Marketing fee: 4.5% of gross revenue
  • Total initial investment: $100,000 to $350,000

Going into Business as a Franchisee or Franchisor & Need Legal Advice? 

The franchise industry is highly regulated and document-heavy. If you’re considering becoming a franchisor or franchisee, you should partner with an experienced Florida franchise attorney from the Cueto Law Group. We’ll make sure that your interests are protected, and your franchise business is set up for success.

Contact us today to get the process started.

Final Thoughts on Franchisors and Franchisees

Both roles have their pros and cons. Which one would be a better fit for you will largely depend on your needs, current financial situation, future goals, and business experience.

To learn more about the benefits and challenges of each role, check out our article on franchising advantage and disadvantages.

FAQs

Here are the answers to questions about franchisors and franchisees we often get in our practice:

What Do Franchisees Typically Have to Pay to the Franchisor?

Franchisees usually pay a royalty fee for the use of the brand, compensation for training and advisory services, a marketing fee, a disclosure fee to cover the franchisor’s legal and administrative costs, and a percentage of the sales. These usually total less than 10% of the gross franchise revenue.

Franchise vs Franchisee, What’s the Difference?

The terms franchisee vs franchise aren’t opposites. A franchisee buys the right to use a franchisor’s business model – including the brand, products, services, and processes – at a specific location and for a set period of time. A franchise is a business formed and run by a franchisee.

What Are the 4 Types of Franchising?

The four types of franchises are: job or operator franchises (home-based businesses in the lower-cost bracket, such as kids’ activities, window cleaning, and delivery franchises); management franchises (the franchisee manages the business, typically aided by employees), retail and fast-food franchises, and investment franchises (e.g., large hotel chains).

Cueto Law Group P.L.