The choice between franchising and independent business ownership can be a complex and confusing one for aspiring entrepreneurs. With so many options and decisions to make, understanding the nuances between franchisee and franchisor roles can be daunting. To assist in separating the facts from the confusion, the International Franchise Professionals Group (IFPG) has compiled the following frequently asked questions about franchising.
What is the definition of a franchisor?
A franchisor is a company that creates and licenses a franchise business model, and the associated trademark, to an operator. The operator may be an individual or company. The franchisor provides the business model, brand, and marketing support, as well as training and operational assistance. The franchisor also serves to protect the brand, and has to approve any changes to the franchise model.
What is the definition of a franchisee?
A franchisee is an individual or company that purchases the right to operate a franchise business. The franchisee purchases the rights and agrees to operate under the franchisor’s terms and conditions. The franchisee is typically responsible for start-up costs, such as equipment and inventory, and is then provided with the training and operational support necessary to execute the business model successfully.
What are the other costs associated with franchising?
Franchising incur other costs such as an initial fee, royalty fees, marketing fees, and expenses for rental, supplies, and staff compensation. In addition to the payment obligations to the franchisor, some franchises have net worth or capital requirements for prospective franchisees.
What is the difference between franchising an existing business, and buying a franchise?
When franchising a business, you are entering into an agreement with a franchisor who already owns the trademarks, products, and services associated with a franchise system. A franchisee obtains the right to operate using the franchisor’s trademarks, products, and services. They are within the brand and receive support, such as marketing, operational, and training support.
When buying a franchise, the franchisee gains the rights to the trademarks, product, and services of the franchisor, without the need to enter into an agreement. The franchisee pays a price for the exclusive rights to use the products and services, and becomes an independent business owner, operating and managing their own franchise business.
What are the advantages and disadvantages of franchising a business?
The advantages of franchising a business include business protection and support, provided by the franchisor, as well as the ability to replicate a successful business model. With franchising, the franchisee also has access to the franchisor’s trademarks and recognition, as well as the ability to tap into the franchisor’s marketing channels and expertise.
The disadvantages of franchising a business are limited flexibility for the franchisee, and potential conflicts in the terms laid out by the franchisor. Franchising can also come with a high initial cost, including fees for equipment, startup and more. For the aspiring entrepreneur, transitioning from employee to business owner via franchising requires the willingness and ability to follow the franchisor’s terms, and the commitment to make it a success.
What are the advantages and disadvantages of buying a franchise?
The advantages of buying a franchise include higher margins than starting an independent business, and being part of a successful brand. Becoming a franchisee also offers market visibility and access to resources and operational support from the franchisor.
The disadvantages of buying a franchise include the costs associated with the process, as well as the necessity of following the franchisor’s terms and conditions. Additionally, it can often take a considerable amount of time to break even, before the franchise begins to see a return on the initial investment.
Being an independent business owner also includes more personal risk and decision making. As a franchisee, you have to be willing to take on more responsibility and risk, and must have the ability to act independently.