As a partnership between businesspeople, franchising can be a challenging route to take, as it is necessarily more complex than running a single-owner business and requires compromise on both sides. Nevertheless, the franchise represents an excellent opportunity both for successful small companies to license out and for entrepreneurs seeking to tap into the success of an existing brand.
The owner of the brand is known as the franchisor. Under a typical franchise agreement, the franchisor provides the specific operations systems, help with staffing and equipment, and advice regarding location, setup, marketing, and the like. In order to protect the brand, the franchisor also generally sets standards for quality and pricing to ensure consistency across all markets.
In partnering with a franchisee, the franchisor receives an influx of capital, as well as any local knowledge that partner may possess. Additionally, as investors, franchisees come with a built-in motivation to grow the brand and stay with the company in the long term.
An entrepreneur who purchases a franchise license is called a franchisee. The franchisee receives rights to use a brand in exchange for fees and a fraction of revenues. In doing so, the franchisee cedes some control over the business, especially with respect to any standards the franchisor has put in place. Despite this limitation, the franchisee benefits from brand recognition and the franchisor’s experience and advertising campaigns.
In many cases, the franchisee is free to innovate in ways that contribute positively to the brand. As long as lines of communication remain open between the franchisor and franchisee, the business relationship between them can and should become mutually beneficial and profitable.