What is a 'Franchisee'

A franchisee is a small business owner that purchases the right to use an existing business's trademarks, associated brands, and other proprietary knowledge. In addition to paying an annual franchising fee to the underlying company, the franchisee must also pay a portion of its profits to the franchisor.

BREAKING DOWN 'Franchisee'

When a business wants to increase its market share or increase its geographical presence at a low cost, it may create a franchise for its product and brand name. A franchise is a joint venture between a franchisor and a franchisee. The franchisor is the original or existing business which sells the right to use its name and idea. The franchisee is the individual who buys into the original company by purchasing the right to sell the franchisor’s goods or services under the existing business model and trademark.

An entrepreneur who has little experience within a given industry may choose to enter a franchise, since the franchisor would provide continual guidance and support on business strategies relating to hiring and training staff, setting up shop, advertising its products or services, sourcing its supply, etc. For example, to set up shop, a franchisee is usually given an exclusive area where no other franchises within the same underlying business currently operate in order to prevent internal competition. In return for the advisory role offered by a franchisor, the franchisee pays a one-time startup fee and an ongoing percentage of gross revenues as royalty to the franchisor. Given the financial costs for opening a franchise, a franchisee requires very little capital to start compared to other business startup options, such as starting a company from the ground up.

A franchisee is expected to follow the proven business model that is already in place, as it helps to provide a consistent state of operations within all companies under the same brand name. Using the business model provided, the franchisee is responsible for the growth of the franchise, which can be attained from advertising efforts in its exclusive area of operation. However, all marketing campaigns must comply with and be approved by the original establishment before releasing them to the public. As the manager of the franchise, the franchisee is expected to protect the brand name of the franchisor by offering only approved products and services that are linked to the brand name of the original company.

A great example of a company that has a global presence due to its franchises is the fast food behemoth, McDonald’s. McDonald’s was founded in 1940 in San Bernardino, California, and by 1954, had four franchise locations. As of year-end 2016, there were 36,899 McDonald’s restaurants in 120 countries. Of the 36,899 restaurants, 31,230 were franchised, which means 84% of the McDonald’s food chain is franchised. The company either owns the land and building used by the franchisees or secures long-term leases for the franchised sites. As part of the contractual agreement between the restaurant and franchisee, a franchisee provides a portion of the capital required by making an initial investment in the equipment, seating, décor, and signs in the location that will be provided. For the fiscal year ended 2016, McDonald’s brought in total revenues of $24.6 billion, of which 38% was from its franchised locations. Revenue received from its franchisees comprises of the initial startup fees, rent for the building provided, and royalty payments based on percentage of the franchisees’ gross revenues.

McDonalds’ successful franchise story can be attributed to its commitment to maintaining consistent standards in its menu that resonate across its various chains. So, an Angus beef burger in Los Angeles should have the same quality as one in London. Franchisees manage pricing decisions and staffing matters, while also benefiting from the brand strength and global experience of McDonald’s.

RELATED TERMS
  1. Turnkey Business

    A turnkey business is a business that is ready to use, existing ...
  2. Franchise P/E

    Franchise P/E, the present value of new business opportunities ...
  3. Licensee

    Licensee describes a business, organization or individual that ...
  4. Brand Management

    Brand management is a function of marketing that uses techniques ...
  5. Brand Extension

    Brand extension, also known as brand stretching, is the use of ...
  6. Brand Identity

    Brand identity is how a business presents itself to, and wants ...
Related Articles
  1. Investing

    Do Fast Food Franchises Mean Fast Returns?

    We look at what it takes to own a fast food franchise: the entry costs, profit potentials, challenges, and sustainability.
  2. Investing

    A Rare Bankruptcy for a McDonald's Franchisee

    McDonald's (NYSE: MCD) apparently only wants big operators serving up fries with that shake as one small franchisee just declared bankruptcy -- a rarity among its operators -- and others have ...
  3. Managing Wealth

    The Cost of Buying a Wendy's Franchise (WEN)

    Learn about the financial requirements associated with opening or buying a Wendy's franchise. How do these compare to other fast food restaurants?
  4. Insights

    McDonald's Is Desperate to Modernize Its Franchisees

    The fast-food chain has agreed to cover over half of the cost of its restaurant makeover plan in a bid to get reluctant franchisees on board.
  5. Small Business

    5 Hot Franchises Right Now

    There are thousands of franchise opportunities to choose from, so getting down to a single option can take time.
  6. Investing

    Trump Admin Rolls Back Rule Affecting Franchise, Gig Workers

    President Donald Trump’s pro-business rhetoric is beginning to take shape.
  7. Insights

    What Consumers Want From McDonalds

    McDonald's is struggling to win back customers who have run off to premium hamburger restaurants. What can the fast food giant do to regain its popularity?
  8. Small Business

    Undervalued Franchises: The Best Choice?

    Searching for an undervalued franchise? Here's a quick guide to what's hot and what's a good bet.
  9. Investing

    McDonald's Q4 Earnings Coming Up: What to Expect

    As evidenced by the recent decline in analysts' fourth quarter estimates, McDonald's results could underwhelm.
  10. Investing

    McDonald's Finds Buyer for SE Asia Branch (MCD)

    The buyer is reportedly Reza Food Services, a company with existing McDonald's restaurants in Saudi Arabia.
RELATED FAQS
  1. What should be included in a restaurant business model?

    Learn what a business model is and its purpose, along with learning the specific elements that should be included in a business ... Read Answer >>
  2. How does brand image and marketing affect market share?

    Building a positive brand image is a must for companies that want an edge over the competition. Learn how marketing and branding ... Read Answer >>
  3. What exactly is a startup?

    Do you want to form your own startup when you have a new business idea? Here is everything you need to know about the startup. ... Read Answer >>
  4. How do tangible and intangible assets differ?

    Tangible assets are physical assets that are used in a company's operations. Intangible assets are nonphysical, long-term ... Read Answer >>
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center