What is a Franchisor

A franchisor is a company which sells the right to open stores and sell products or services using its brand, knowhow and intellectual property to a franchisee. The franchisor receives an initial start-up fee, and an annual fee or percentage of the branch’s profits. It may also charge for other services.

BREAKING DOWN Franchisor

Franchising is a good way for franchisors to increase market share and geographical reach, while minimizing capital expenditure. Franchises can be more profitable than corporate owned chains, because franchisees are incentivized to maximize the profitability of their outlets, and are responsible for overhead like staff. Reduced corporate overhead can make franchises more profitable, even when its outlets are less profitable than they would be if they were run as chain stores.

But franchisors have to continually police the franchise, to ensure that standards, product quality and brand values are maintained. A franchise’s goodwill can decrease if third parties copy the franchisor’s brand or business model, or if franchisees exploit or underpay workers.

Franchising Uses

Franchising is often used for global expansion, because it enables franchisors to benefit from the local knowledge of their franchisees. By selling franchises using a master franchise model, the franchisor gives the franchisee responsibility for further expansion in that area or country, and is granted the right to sub-franchise.

Investors should be aware though, that up-front charges or start-up fees can flatter the revenues of the franchisor in fast-growing franchises. Such front-end loads exaggerated the financial performance of The Bodyshop, a British cosmetics, skin care and perfume company, after it went public in the mid-1990s.

Examples of Franchising

Private equity has grown increasingly attracted to franchises with proven business models and continuous royalty streams. Arby’s, owned by Roark Capital, bought Buffalo Wild Wings in 2017, and JAB Holdings bought Panera Bread in 2017 and Krispy Kreme Doughnuts in 2016.

However, takeovers of franchises can hurt existing franchisees, if the franchisor increases profits at their expense, by reducing brand investment or support.