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.

  1. Franchisee

    A franchisee is a small business owner that purchases the right ...
  2. Franchise Factor

    The franchise factor is the measurement of the impact on a company's ...
  3. Franchise Tax

    Franchise tax is a tax levied at the state level against businesses ...
  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. Licensee

    Licensee describes a business, organization or individual that ...
Related Articles
  1. Small Business

    Share The Wealth With Franchises

    Skip the first step and build off someone else's successful business model.
  2. Small Business

    6 Franchises That Are Cheap To Start

    These franchises are in the realm of financial reality for every-day people. Check them out to see if you'd like to run your own franchise.
  3. Investing

    Tool Franchisers Fight For Financing

    Snap-on and Matco Tools are competing for franchisees, but less available financing makes it a tough go.
  4. Investing

    Trump Admin Rolls Back Rule Affecting Franchise, Gig Workers

    President Donald Trump’s pro-business rhetoric is beginning to take shape.
  5. Investing

    Yum! Brands Will Sell Most Stores to Franchisees

    Yum! Brands (NYSE: YUM), the parent company of Taco Bell, KFC, and Pizza Hut, plans to more or less get out of the business of owning stores. The company has decided to sell most of its company-owned ...
  6. Investing

    The Top 5 Restaurant Stocks for 2016 (CMG, DNKN)

    Discover the top five restaurant stocks expected to grow in 2016, with a summary, growth outlook and price target for each company.
  7. Investing

    McDonald's: Investors Are Lovin' It

    McDonald's $70.7 billion in sales towers above its competitors and it's not showing any signs of weakness.
  8. 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.
  9. Investing

    Heavy Bidding Worth $3B for McDonald's China, Hong Kong Stores (MCD)

    McDonald's has received more than half a dozen bids for its stores in China and Hong Kong, which could generate around $3 billion.
  10. Financial Advisor

    4 Quick Service Restaurants for Your Portfolio (CMG, PNRA)

    Learn about the four quick service restaurants with attractive investment theses and growth prospects that can be valuable additions to your portfolio.
  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. What impact does brand equity have on profit margins?

    Learn how both positive and negative brand equity affects profit margins by influencing profit per customer, sales volume ... Read Answer >>
  3. 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 >>
  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 >>
Trading Center