A franchise is an agreement between two parties franchisor and a franchisee. A franchisor owns a successful business, and it sells the right to copy its business model. A franchisee buys this right and implements the franchisor’s business model in a different location.
The franchisee opens one or more units/outlets of the business in new locations using the franchisor’s business model and trademark. The franchisor provides training and guidance to the franchisee to ensure that customers consistently receive the same product and/or service no matter which location they visit.
One of the most well-known examples of a franchise business is McDonald’s. This US-based fast food chain has 38,000 units in more than 100 countries. If we consider local franchises, the grocery chain Shwapno is a good example with outlets all over Bangladesh.
Franchising benefits franchisees by eliminating the hassles and costs of building a business from scratch and acquiring customers. It benefits franchisors by generating income through various streams. For example, franchisees pay an initial, one-time fee to franchisors for the franchise license. McDonald’s charges an initial franchise fee of $45,000 to its franchisees.
The franchisee also pays a fixed percentage of revenue/gross profit to the franchisor every month, called a royalty or licensing fee. For example, McDonald’s charges 4% of its franchisees’ gross profit as a royalty fee. Some franchisors implement marketing campaigns for themselves which also benefit franchisees. Franchisees pay a percentage of their gross profit every month for this. McDonald’s franchisees pay 4% of their gross profit as an ad royalty fee every month.
Franchisors provide training to franchisees to help them understand the business systems and replicate them. Franchisors also provide equipment (if needed), inventory, and business advisory services to franchisees, for which they receive payment.
Some franchisors also conduct training programs for the employees of their franchisees. E-learning has become an important tool for imparting this type of training. Other franchisors allow the franchisees’ management to train their own staff and may provide ToT (Training of Trainers) to facilitate it.
We can see from above that the role of a franchisor includes providing training, equipment, and guidance to the franchisee, as well as developing and implementing marketing campaigns. Generally, franchisors don’t interfere in the day-to-day operations of franchisees’ business units. Franchisees are free to recruit their employees and set their employment standards without any restriction from franchisors.
What about the role of a franchisee? One of the main duties of a franchisee is to implement the franchisor’s business model and to ensure consistency with the franchisor in business operations. The franchisee must adopt standard practices set by the franchisor, like placing logos and signs at specific places within their units. If franchisees want, they can develop their own marketing campaigns to grow their customer base, but these campaigns must be approved by franchisors before being launched.
The franchisee must adopt standard practices set by the franchisor, like placing logos and signs at specific places within their units. If franchisees want, they can develop their own marketing campaigns to grow their customer base, but these campaigns must be approved by franchisors before being launched.
Franchisors generally have selection criteria that potential franchisees must fulfill before they can purchase a franchise. For example, to obtain a 7-Eleven franchise in the US, an applicant must be at least 21 years old, have US citizenship or permanent residency, pass a background check, and have no conflicting business interests that could affect their 7-Eleven franchise negatively.
Are you interested in becoming a franchisee? Or are you a business owner looking to franchise your business? Need help navigating through this exciting business opportunity? Contact us here!