The world of the franchise seems more straightforward than what it actually is.
When you see that a company has many stores spread around the country, for example, you may think that that’s a franchise, but it is actually not.
A person who runs a franchise business may be called a franchise, but it is actually the wrong term.
There is a lot of confusion, for example, about the terms franchise and franchisee or franchisee and franchisor. In this article, we are clarifying any aspects of franchise and franchisee.
What Is A Franchise Business?
Before moving on to understand the difference between franchise VS franchisee, it could be useful to understand what is a franchise business.
A franchise business is a company that allows franchisees to sell their products or services under their brand name.
For example, Dollar Tree is a franchise. It means that it allows partners external to the company (they are not employees or associates) to create a Dollar Tree store.
When the company also manufactures its products, like ZARA, for example, franchisees are not only authorized to open a franchise store but also to sell ZARA products and the ZARA brand name. But how does it work?
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The Franchise Fee
Probably the main thing to know about franchise businesses is the presence of the franchise fee.
The franchise fee is a commission investors need to pay to obtain the authorization to open the store and sell the product.
You are paying, in other words, for the right to use a brand name and sell branded products.
Franchise fees can be of different types: the most common is a franchise fee that you pay once, at the beginning of your franchise adventure, and that allows you to use the brand name for an indefinite time.
This type of franchise fee is usually rather high – usually, the most popular the brand, the higher – it could go from $10,000 to $40,000 or even more.
Another type of franchise fee is the one that requires you to pay a percentage of all your sales to the franchise company. It could be 3% or 4%.
Sometimes, you are required to pay both an initial franchise fee and a royalty fee that is a percentage of your sales.
Restrictions
When you become a franchise partner of an important company, you become the owner of one of their stores, but it doesn’t mean that you have full autonomy.
When you run your own store or retail business, you can do anything you like: you can sell any type of products you like, provide the services you like, hire the number of people you think you need, and so on.
This isn’t always possible with franchise businesses: very often, the main company dictates some conditions, and they can be more or less restrictive.
Almost always, the main company tells you what kind of products you can or cannot sell in your store.
Furthermore, they could require a location of certain dimensions, located in an area with a certain density; they could require a certain number of employees and more.
Last but not least, franchise businesses often have precise requirements about how you need to furnish your store.
Franchise And Franchisee
Now that we know what a franchise business is and how it works, it is easier to understand the difference between a Franchise VS. Franchisee.
The two terms look almost alike, but they are profoundly different.
What Is A Franchise?
A franchise is a business that is open to franchise partners. It is a business that allows entrepreneurs to launch a business using the company’s and brand’s name.
As we’ve seen, the franchise company receives a franchise fee and can dictate some conditions. These conditions must be indicated in the franchise contract.
Other than what is included in the contract, the franchise partner is autonomous in running their business.
In simple terms, when we use the term franchise, we are referring to the company. However, the franchise is also the term we use to indicate the business model.
We can say, for example, Zara is a franchise, meaning that the company adopts the franchise business model.
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What Is A Franchisee?
The franchisee is the person who obtains permission to use the company’s and brand’s name from the franchise business. It is what we’ve called so far the franchise partner.
If you pay Zara a franchise fee and open a Zara store, for example, Zara is the franchise business, and you are the franchisee.
In simple terms, when we use the term franchise, we are referring to the business, while when we use the term franchisee, we are referring to the person who signs the contract with the franchise business.
Any Other Important Terms?
If you are interested in a franchise business, you may have come across another term: franchisor. What does it mean?
Franchisor is another term that we can use to indicate the company that grants the license to the third party or the franchisee.
In franchise businesses, you have two subjects involved: the franchisor, which is the company that grants the franchise license and that receives the franchise fee, and the franchisee, the person that receives the franchise license and the permission to use the brand name and that pays the franchise fee.
Conclusion
In this article, we’ve made some order between the different terms involved in the franchise business model.
To sum up, the franchise business, or franchisor, is the company that sells the right to use the brand name to open a new store and/or sell branded products. The franchisee is the person who receives the rights.
The franchise business, or franchisor, receives the franchise fee while the franchisee pays it.
Franchisees and franchisors are the two subjects involved in the franchise business model.
Amit Gupta is the founder of DrFranchises – a digital marketing agency that helps brands rank better on Google Maps through local SEO strategies. Amit has over 11 years of experience in digital marketing, SEO, email marketing, and social media marketing. He’s also the owner of multiple franchises and has helped countless brands achieve success online. When he’s not working, Amit can be found playing with his dog.