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.

  1. Franchise disclosure document

    The franchise disclosure document is a document that must be ...
  2. Franchisor

    A franchisor is a company which sells the right to sell products ...
  3. Franchise Factor

    The franchise factor is the measurement of the impact on a company's ...
  4. Franchised Monopoly

    A franchised monopoly is a company sheltered from competition ...
  5. Franchise Cover

    Franchise cover is a type of reinsurance plan in which the claims ...
  6. Franchise P/E

    Franchise P/E, the present value of new business opportunities ...
Related Articles
  1. Small Business

    Is Buying a Franchise Wise?

    If you like being your own boss, this is not the job for you.
  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. Insights

    The Cost of Buying a Taco Bell Franchise (YUM)

    A Taco Bell franchise is one of the most expensive to buy and operate in the fast food business.
  4. Financial Advisor

    What's The Best Franchise Investment For You?

    How do you figure out which franchise is the best for you and your budget? Read on.
  5. 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?
  6. 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.
  7. Insights

    The Cost of Buying a McDonald's Franchise (MCD)

    Setting up a new McDonald’s franchise can cost the owner up to $2.2 million to get the restaurants up and running, but it can be very profitable
  8. Small Business

    Franchise Fees: They Can Get Expensive

    Here are a few of the most expensive franchises available for purchase in the United States.
  9. Small Business

    Best Franchise Opportunities For 2012

    These franchises have proven successful for many franchisees, and some of them are really affordable.
  10. Investing

    Diamond in the Rough? U.S. Franchises in 2016 (MCD, DNKN)

    Learn about U.S. franchise growth and direction for 2016 and how changes in wage standards and consumer preferences may endanger large fast food chains.
  1. Why did Howard Schultz decide to keep Starbucks a chain rather than allow franchising?

    Read about why billionaire Howard Schultz chose to keep Starbucks a chain rather than franchising and how he led the chain ... 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 >>
Trading Center