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. Turnkey Business

    A turnkey business is a business that is ready to use, existing ...
  5. Franchised Monopoly

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

    Franchise cover is a type of reinsurance plan in which the claims ...
Related Articles
  1. Small Business

    Share The Wealth With Franchises

    Skip the first step and build off of someone else's successful business model.
  2. 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.
  3. 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.
  4. Insights

    The Cost of Buying a Subway Franchise

    Learn about the costs of franchising a Subway restaurant and all that goes along with becoming an entrepreneur in the restaurant industry.
  5. Small Business

    Best Franchise Opportunities For 2012

    These franchises have proven successful for many franchisees, and some of them are really affordable.
  6. 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?
  7. 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.
  8. 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
  9. 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 ...
  10. Small Business

    5 Alternatives to Starting Your Own Business

    Starting a business isn't for everyone, learn 5 alternatives to starting your own business such as businesses to invest in, franchises and other choices.
  1. What are some examples of different types of business models in major industries?

    Learn what types of business models are currently being used in the marketplace as well as examples of models that work for ... Read Answer >>
  2. What are some of the benefits of positive brand equity?

    Learn how having positive brand equity enables companies to make a higher margin on sales and spend less money on marketing ... Read Answer >>
  3. 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 >>
  4. 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