If you’re starting to give some thought to franchising as a way of escaping the nine to five and gaining financial freedom, you’ve probably got a lot of questions. While franchising is a great way of taking your first step toward building your business empire, there’s a lot to know – and a lot to do – before getting started.
One of the most common questions we’re asked is, “what’s the difference between a franchisor and a franchisee” and, in this article, we’ll be answering that question. First, though we need to explain what franchising is to better explain the difference between a franchisor and a franchisee.
Not to be confused with other business models, franchising is a business model which is open to individual members of the public and involves an individual buying into a larger company in order to open their own branch or office. For example, TaxAssist Accountants, the accountancy company, is a franchise business and, in this instance, the individual would pay an initial fee plus a monthly percentage of takings in order to be able to open their own branch of TaxAssist Accountants and, to take advantage of the company’s branding, suppliers and marketing efforts.
There is a wide range of franchise businesses available within the UK and, the start-up costs for these can range from just a few hundred pounds to hundreds of thousands, depending on the brand.
What is a franchisor?
Franchisor is the term given to the company or umbrella group of companies, which makes up the brand of the franchised business; for instance, McDonald’s or Amazon Logistics. The franchisor is an entrepreneur who will usually have been in business for several years and will be able to boast the following:
A proven business model – In order to be successful, the franchisor’s business model will have been tried and tested in a number of locations and will be easily transferable.
Recognisable branding – A franchisor’s business model will usually include distinctive branding, which most people will be easily able to spot on their local High Street, such as McDonald’s and Starbucks.
Established systems and suppliers – The franchisor’s business will already have a solid network of suppliers from whom they will enjoy rock bottom prices through bulk ordering across a number of locations. They will also have guidelines and processes in place to ensure that each separate franchise business runs in the exact same way and produces the same quality of product or service.
Training and support personnel – In order to make sure that all of the above happens as it should, the franchisor will normally have a training and support team in place to make sure that the running of each individual franchise is consistent and effective.
When a business has achieved a certain amount of success, it’s only natural for the owner to start looking at growth and expansion, both nationally and internationally. This can be extremely complex and time-consuming for a business owner, particularly when negotiating and securing premises and/or suppliers overseas.
Instead of spending a huge amount of time wading through red tape and spending tons of money, the business owner can, instead, become a franchisor. This means that they will allow individuals to set up branches of the company in new locations and then run them according to pre-set guidelines, thereby becoming a franchisor. The franchisor will then charge a buy-in fee and ongoing fees to the person who has bought in.
The benefits to the franchisor are:
- They earn money in fees.
- Their financial outlay for expansion is minimal
- They can expand quickly
- They can expand internationally without hassle
- Their brand becomes increasingly well known
Franchising is a really effective, affordable and relatively fast way of expanding a business and increasing the income and profile of the business owner.
What is a franchisee?
The franchisee is the individual who buys into the franchisor’s business. Although it is possible to buy into a franchise without any skills or experience, it is recommended that an individual does their best to match existing skills and interests to a chosen franchise business for the best chance of success.
The franchisee will pay an initial fee to the franchisor, which secures their business and gives them access to the company’s branding, suppliers and training. They will also pay a monthly fee – usually a percentage of their earnings – to the franchisor as part of their franchise agreement.
When somebody starts their own business from the ground up, there are lots of risks – and it’s these which usually result in people packing their dreams of independence away and setting the alarm once again for their dull but secure job. Choosing a franchise business instead has several benefits, including:
Reduced risk – As the franchisee is buying into a successful, established business, the risk of failure is significantly reduced.
Low cost – Starting your own company is an expensive business – and one which often involves nasty surprises in terms of expenses that you haven’t budgeted for. In comparison, a franchise business is a relatively low-cost business – with many options starting from just a few hundred pounds for a start-up fee. These lower costs can make the dream of owning your own business much more accessible.
Lending a hand – With any kind of new business, there’s a good chance that you’ll need to secure funding from a bank or other financial organisation. Banks are extremely cautious about handing out loans to new, unheard of businesses; particularly since the beginning of the pandemic. On the other hand, a franchise business tends to present a much safer bet to a lender because the business already has an established customer base. This means that the franchisee is significantly more likely to be successful with their loan application.
A support network – Setting up in business for yourself can be pretty lonely – not to mention stressful, particularly when having to manage employees and to make sure that all your legal ducks are in a row. With a franchise business, you have a ready-made support network of people who know what you’re going through and who can offer real, actionable help and advice.
While some may say that there are drawbacks to a franchise business, such as a lack of autonomy and the fact that you’re not able to make significant changes to the business, all of this is very much outweighed by the benefits highlighted above. The successful franchisee can go on to grab more slices of the pie in the form of further franchises and can, therefore, set themselves up for life and beyond.
To sum up, the franchisor is the original business owner who may expand its business by franchising it out to individuals. The franchisee is such an individual who may choose to set him or herself up in a comparatively risk-free business by buying into and running their own branch of an established brand.
Whether you’re the franchisor or franchisee, there are many factors to consider before committing to such an enterprise. For the franchisor, it’s a good idea to seek the services of a finance professional to see how your model stacks up before going ahead. For the franchisee, the key to success is in taking your time in choosing your franchise opportunity and always ensure you pay close attention to the fine print to make sure that you know what you’re getting yourself into.