Franchisor

What Is Franchisor?

A franchisor sells the right to open stores and sell products or services using its brand, expertise, and intellectual property. It is the original or existing business that sells the right to use its name and idea. The small business owner who purchases these rights is called a franchisee and the branch business, itself, is called a franchise.

Understanding Franchisor

The franchisor company generally receives an initial start-up fee, an annual fee, and a percentage of the branch’s profits. It may also charge for other services. Well-known corporate franchisors include Hertz (HTZ), Marriott International (MAR), McDonald's (MCD), and Subway (privately held).

Becoming a franchisor is generally a good business alternative, especially for large, already successful companies, though there are both advantages and disadvantages.

The relationship between a franchisee and franchisor is inherently one of advisee and advisor. The franchisor provides continual guidance and support concerning general business strategies such as hiring and training staff, setting up shop, advertising its products or services, sourcing its supply, and so on.

The franchisor's advisory role is not free, however; it is part of the entire package that the franchisee purchases. Even when the relationship is solidified, and the two have been working together successfully, the franchisor still acts as a mentor. A franchisor's parental role is an ongoing commitment. In fact, franchisors generally police their franchises constantly — albeit some more than others — to ensure that they are maintaining the parent company's standards, product quality, and brand values.

Some of the more common types of stores that franchisors can offer franchisees are:

A chain store is one of a series of stores owned by one company; if Starbucks (NASDAQ: SBUX), for example, were to franchise some of its stores, then those would be owned by outside investors — not by the original company — and Starbucks would become a franchisor.

Generally speaking, a franchise agreement won't protect franchisees if their franchisor declares bankruptcy. In fact, franchisees are usually obligated to pay royalties and continue operating amid a franchisor bankruptcy. When a franchisor files for bankruptcy, the court will immediately impose a stay of all actions against the franchisor. In other words, franchisees aren't allowed to take legal action against the franchisor.

The following steps in the process are determined by the type of bankruptcy the franchisor chooses to file for.

In either case, a franchisor's bankruptcy will likely have a significant impact on its franchisees.

Franchisor Advantages

Royalties paid to franchisors vary by industry, location, company size, and financial strength. That said, royalties paid to franchisors usually fall in the range of between 4.6% and 12.5%.

Franchisor Disadvantages

Some may think — partly because of the steep cash outlay — that franchisees assume more risk than franchisors. But there are potential disadvantages for franchisors, too.

Franchisor Example: Dunkin' Donuts

Dunkin’ Brands Group (DNKN) went private after it was bought out by Inspire Brands Inc. in late 2020. It used to be called Dunkin' Donuts, began operations in 1954 and has been franchising since 1955.

With more than 130 years of franchising experience, Dunkin' is home to two of the world's most recognized franchises: Dunkin' and Baskin-Robbins. According to Inspire Brands Inc. website, there are "11,300 Dunkin' restaurants worldwide – that's over 8,500 restaurants in 41 states across the U.S.A. and over 3,200 international restaurants across 36 countries." As a franchisor, Dunkin’ licenses stores and restaurants that sell Dunkin’ coffee, donuts, bagels, muffins, compatible bakery products, sandwiches, and other food items and beverages compatible with the franchisor’s concept.

Most companies that offer franchising opportunities post how-to information for prospective franchisees on their websites. Generally, this is comprehensive, voluminous, and often written in legalese or boilerplate. In its franchisor role, Dunkin's text speaks to its would-be franchisees clearly and understandably, as the following sample shows.

Training Overview

Obligations and Restrictions

Financial Assistance

Dunkin' typically does not offer to finance its franchisees. However, from time to time, it may, at its discretion, offer voluntary financing to existing franchisees for specific programs such as the purchase of specialized equipment or accelerated development in specified markets. The franchisor may facilitate certain third-party lending arrangements that may provide financing for qualified franchisees. The amount of financing and repayment period varies by program, circumstances, and creditworthiness of the applicant.

Estimated Initial Investment

Dunkin' estimates that the cost to open one of its franchises — not including real estate costs — is approximately $95,700 at the low end and $1,597,200 at the high end. More information, including a complete breakdown of the fee schedule, can be found on the franchisee page of their website.

What Franchises Make the Most Money?

Here are five of the biggest money-making franchises, and the initial investment required:

What Are Among the Least Expensive Franchises?

Here are five lower-cost opportunities with strong brand power, and the initial investment required: