Explain the relationships among a franchise, the franchisor, and the franchisee

While a franchisor is an established entrepreneur with a licensed business model, a franchisee is a person or corporation that owns and operates the business using the business model licensed by the franchisor.

Franchising describes the business relationship between the franchisor and franchisee. When opening a franchise, the franchisee agrees to run their own business under the same business name for a fee. The specific franchise agreement determines the relationship between the franchisor and franchisee.

What is the relationship between the franchisor and franchisee?

The franchisor is an experienced business owner who provides a well-developed franchise business model that the franchisee invests into. The franchisor is essentially the “mentor” in the relationship, offering industry experience, proven business models, training materials, and guidance to contribute to the franchisee’s success.

In many cases, reputable franchisors provide initial training and ongoing support to help their franchisees grow a successful business. Some franchisors also offer helpful tools to ensure the long-term success of their franchisees, such as business management software, inventory management systems, and marketing materials.

What is the role of the franchisor?

The role of the franchisor will vary depending on the specific business model and the franchise agreement. Above all else, the franchisor offers the franchisee a valuable opportunity to run their own business without the common risks of independent startups.

Some common franchisor responsibilities include:

• Allowing the franchisee to provide services under the business’ brand name
• Providing initial training on how to grow the business and perform day-to-day operations based on their proven business model
• Provides on-site training and support leading up to and after the grand opening day
• Offering an approved list of vendors and suppliers for necessary equipment and materials
• Providing effective marketing programs and advertising materials
• Providing guidance in terms of developed business practices
• Ensuring that the franchisee receives ongoing support with operations, marketing, administration, and more

What is the role of the franchisee?

After the franchisee pays the initial franchising fee and signs the agreement, they agree to represent the established business. Franchisees generally have the following responsibilities:

• Developing the franchisor’s business in an established location and protecting the brand’s reputation
• Covering different types of costs to establish their business
• Investing time to learn about the business’ standards and operations
• Closely following business and operational practices and procedures
• Following the business marketing strategy using brand usage guidelines

When both the franchisor and franchisee keep up their responsibilities and obligations outlined in the franchise agreement, both parties can enjoy the benefits of a successful, thriving business.

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Defining the roles and responsibilities of key players in a franchise can improve business relationships – and lead to success.

Before selling your first franchise – or buying your first franchise business – it’s important to understand the role you’ll be playing in the franchise system.

From knowing who is responsible for training and marketing expenses to understanding your legal obligations under the franchise agreement, defining the role of the franchisor and franchisee can prevent confusion and keep daily operations running smoothly. Whether you’re selling franchise opportunities or investing in a business, making sure your role and responsibilities are clear early on can strengthen the franchisor-franchisee relationship and prevent future legal issues from arising – something that can clear the path for franchising success.

The roles of a franchisor include:

• Having a Proven Business Model

• Registering a Trademark

• Establishing Business Systems

• Proprietary Market Knowledge

• Vendor Relationships

• Training and Pre-Opening Support

• Provide Ongoing Assistance

The roles of a franchisee include:

• Paying initial and Ongoing Fees

• Being Responsible for Day-to-Day Operating Expenses

• Maintaining Brand Standards

• Following Established Systems

• Managing and Developing Franchised Locations

Read on to find out more about the responsibilities of franchisors and franchisees, and learn about the differences between each role when it comes to developing and operating a franchise.

What is the role of a franchisor?

A franchisor is typically an entrepreneur who has laid the groundwork to create a successful, established business. Pursuant to a Franchise Disclosure Document (FDD), a franchisor offers and sells franchises to prospective franchisees.

Responsibilities of a Franchisor

Under the Federal Trade Commission’s Franchise Rule, the responsibilities of a franchisor must be disclosed to franchisees within the FDD. Because a franchisor’s obligations to franchisees might include additional, optional responsibilities that go beyond what is required by law, a franchisor’s responsibilities must also be described within the franchise agreement. Although the specific obligations of a franchisor can vary based on their industry and business, the following are common responsibilities of most franchisors:

A Proven Business Model

To become a franchisor, you must have reached a point in which your business model irrefutably works. Consumers recognize your brand and seek out your products or services.

A Recognized Trademark

Registered trademarks are among the most valuable assets that a franchisor has acquired through careful research as well as trial and error. Establishing a recognized trademark and securing federal rights to that mark often requires a great deal of time and dedication.

Established Business Systems

As a successful entrepreneur with a proven business model, you’ve developed a system of conducting business that produces reliable results. From working with customers and clients to delivering products and services consistently, the franchisor has an established business model that franchisees will follow.

Proprietary Market Knowledge

Throughout the process of developing a successful business, franchisors acquire a high level of industry expertise. They know who their customers are, where they live – and what they want. They also know how to sell those goods and services in a way that is consistent with their brand and appeals to their target demographics.

Vendor Relationships

As a seasoned and successful entrepreneur, the franchisor can connect its franchisees with quality vendors – ideally, at affordable prices.

Training and Pre-Opening Support

One of the most important contributions that the franchisor provides is extensive training and pre-opening support. With the guidance of an experienced entrepreneur, the franchisees learn from someone with proven success.

Ongoing Assistance

In addition to training and pre-opening support, most franchisors provide ongoing business assistance to franchisees after a franchise location opens. These responsibilities vary between franchise systems but usually include marketing assistance and business development support. The franchisor’s assistance obligations, including pre- and post-opening support, are described in the franchise agreement and disclosed within Item 11 of the FDD.

What is the role of a franchisee?

A franchisee, through a franchise agreement with the franchisor, is granted the right and obligation to establish and operate a franchised location. Franchisees typically pay franchisors a one-time upfront franchise fee and ongoing royalty fees in exchange for the right and obligation to establish a franchised location using the franchisor's systems, know-how and licensed marks.

Responsibilities of the Franchisee

A franchisee's role is to duplicate the franchisor's successful business model in order to help it expand into a regional or national market. It is not a passive role, by any means, and requires significant investment and work. Like the franchisor, a franchisee’s responsibilities must be clearly described in the franchise agreement and the FDD, specifically within Item 9. Although the specific obligations of a franchisee will vary between franchise systems, the following are typical responsibilities of most franchisees:

Paying Initial and Ongoing Fees

Franchisees are required to pay a franchise fee in order to obtain the right to establish a franchised business location as well as royalties, a percentage of gross revenues and a fee for advertising costs.

Operating Expenses

As business owners, franchisees are responsible for paying for the day-to-day operating expenses of their franchise business. This includes expenses like paying employees and managers, rent, business taxes and other costs related to operating the franchise location.

Maintaining Brand Standards

Because franchisees represent an established brand and operate under a licensed trademark, it’s their responsibility to maintain the brand’s standards and reputation. This includes offering products and services that are consistent with brand standards.

Following Established Systems

One of the benefits of being a franchisee is having a specific set of established systems to follow for success. Franchisees are obligated to follow the operations and procedures established by the franchisor, which are typically outlined in the franchise operations manual.

Management and Development of Franchise Location

Franchisees take the franchisor's business systems, training and know-how and put it into practice in their location. Franchisees essentially have a framework for making their franchise location a success, but control the day-to-day operations independently.

Although the franchisor and franchisee each play very different roles in the franchise system, they are equally important to its long-term success. By defining and understanding each party’s responsibilities, franchisors and franchisees can keep daily operations running smoothly while strengthening their business relationship and preventing future issues.

Before starting a franchise or purchasing a franchise, it is critical to understand the role of both parties in the franchise system. To learn more about franchising, contact us at (800) 976-4904.

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