# Franchisee: Definition, Examples, Benefits, and Responsibilities

![Franchisee: A person who purchases the right to use an existing business's trademarks, brands, and proprietary knowledge.](https://www.investopedia.com/thmb/Q1QEzJUrRpHWnI3oAhSnFa1IKQo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/franchisee.asp-FINAL-1-1-1a5b2c15bb8e420697ccf6d364e08114.png)

*— Investopedia / Joules Garcia*

> **Definition**
>
> A franchisee is an independent business owner who operates a branded business and pays fees to the franchisor.

## What Is a Franchisee?

A franchisee is an independent business owner who operates a third-party retail outlet called a [franchise](https://www.investopedia.com/terms/f/franchise.asp). This means that the franchisee purchases the right to use an existing business's [trademarks](https://www.investopedia.com/terms/t/trademark.asp), associated brands, and proprietary knowledge to market and sell the same brand and uphold the same standards as the parent business, which is known as the franchisor.

### Key Takeaways

*   A franchisee is a business owner who is licensed to operate a branded outlet of a retail chain.
*   The franchisee pays a fee to the franchisor for the right to sell its established products and use its trademarks and proprietary knowledge.
*   The franchisee receives guidance and operational and marketing support from the franchisor.
*   The franchisee is required to market and sell the same brand and uphold the same standards as the parent company.

## Understanding Franchisees

A franchisee is an individual who is licensed to do business under an existing company's name. The franchisee buys the rights to the franchise. This means they purchase the right to use the brands, products, materials, and trademarks of the [parent company](https://www.investopedia.com/terms/p/parentcompany.asp), which is known as the [franchisor](https://www.investopedia.com/terms/f/franchiser.asp).

A business that wants to increase its [market share](https://www.investopedia.com/terms/m/marketshare.asp) or geographical presence at a low cost can create a franchise. Franchises are available across a wide variety of industries and have become an extremely popular way for individuals to do business. It is hard to drive more than a few blocks in most cities without seeing franchise businesses.

Franchisees are usually responsible for paying a franchise fee (the price paid when they sign the contract) and may be required to have a minimum initial investment or [net worth](https://www.investopedia.com/terms/n/networth.asp) before they can purchase a franchise. Once established, they must pay fees and royalties. According to a 2023 report from Franchise Business Review, the average franchisee's annual income was $102,910.  

## How to Become a Franchisee

Becoming a franchisee can be exciting and rewarding—especially because some of the work is already done for you. We've laid out some steps to becoming a franchisee if you've ever wanted to start a business under an existing brand name:

1.  Do your research. Consider what type of franchise you'd like to operate. Narrow down the list to a handful of names that interest you and may be available in your area.
2.  Study the financial requirements of each of your choices. It doesn't make sense to get your hopes up about doing business under a brand that you can't afford.
3.  Speak to existing franchisees. These individuals can give you an idea of the perks and challenges that they've faced while doing business. They can also give you guidance on what's expected of you as a franchisee, including the costs, as well as the franchise system.
4.  Draft a [business plan](https://www.investopedia.com/terms/b/business-plan.asp). This becomes your pitch to the parent company, telling management why you want to purchase a franchise. Your plan will help you understand the nature of the business and give you and your franchisor an idea of what your revenue and cash flow will look like, especially after the first year.
5.  Review and sign your franchise agreement. Make sure you understand your role, rights, and responsibilities as a franchisee before signing. You may want to get a lawyer to review the contract before you sign.
7.  Set up your business entity. You can do this as a [limited liability company (LLC)](https://www.investopedia.com/terms/l/llc.asp) or as a corporation.
8.  Choose your location. Most franchisors will give you a general idea of where they want you to do business.
9.  Hire your staff, market your franchise, and start doing business.

## The Franchisee/Franchisor Relationship

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

The franchisor assigns the franchisee an exclusive location far enough from its other franchises once the two parties sign the contract. This helps the new and existing franchisees avoid direct competition. The franchisee pays a franchise fee and ongoing royalty or license fees in exchange for the franchise, which includes the use of the company's [intellectual property](https://www.investopedia.com/terms/i/intellectualproperty.asp), and experience.  

> **Tip**
>
> As with any investment, research your options thoroughly before you decide to purchase a franchise.

## Franchisee Responsibilities

A franchisee must follow the proven business model that is already in place, down to its choice of location, furnishings, products, and decor. Franchisors require this to maintain consistent quality among all of the locations using its brand name.

The franchisee is responsible for growing the franchise via the usual means of advertising and marketing within its exclusive area of operation. However, all [marketing campaigns](https://www.investopedia.com/terms/m/marketing-campaign.asp) must be approved by the original establishment before their release.

As the manager of the franchise, the franchisee is expected to protect the brand name by offering only approved products and services that are created by or sourced by the original company.

## Advantages and Disadvantages of Being a Franchisee

### Advantages

Operating a franchise can be an ideal venture for an [entrepreneur](https://www.investopedia.com/articles/investing/092514/entrepreneur-vs-small-business-owner-defined.asp) with little or no direct experience in business management because:

*   The costs of opening a franchise can be lower compared to [starting a company](https://www.investopedia.com/terms/s/startup.asp) from the ground up.
*   The business has immediate [brand recognition](https://www.investopedia.com/terms/b/brand-recognition.asp), a ready-built supply system, and a professional marketing campaign already in place.
*   Franchisees adopt the business practices of their franchisors rather than create them from scratch.
*   The franchisor is invested in the success of its franchisees and will take an active advisory role.  
    

### Disadvantages

While there are perks of being a franchisee, there are also drawbacks. Potential franchisees should consider that:

*   Although the cost of [buying a franchise](https://www.investopedia.com/articles/pf/07/franchise_model.asp) may be lower than a new business, franchisees must pay a franchise fee and prove they have the initial investment to back up the business. This amount varies and depends on the company and type of business. [Fast food](https://www.investopedia.com/articles/investing/020515/fast-food-versus-fast-casual.asp) franchises can command an initial investment of at least $500,000.
*   They don't have complete control over their business. While they have some decision-making power, they do not operate independently as the franchisor has more authority in the business relationship.
*   They are subject to ongoing fees and [royalties](https://www.investopedia.com/terms/r/royalty.asp) payable to the franchisor.
*   There is a risk to their investment in the franchise, even with an established brand, Anything that can damage the brand's name or reputation can have a direct impact on the franchisee and its business.  
    

Pros

*   Lower startup costs than building a business from the ground up
    
*   Capitalize on the franchisor's existing brand, supply system, and marketing
    
*   Ability to adopt franchisor's business practices
    
*   Franchisor actively advises and helps franchisee
    

Cons

*   High franchise fees and initial investments
    
*   Franchisee isn't completely independent
    
*   Must pay ongoing fees and royalties
    
*   Damage to brand can put the franchise at risk
    

## Example of a Franchisee

Some of the most common examples include Subway, United Parcel Service ([UPS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ups)), H&R Block ([HRB](https://www.investopedia.com/markets/quote?tvwidgetsymbol=hrb)), and McDonald's ([MCD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=mcd)). As of 2024, there were more than 38,000 [McDonald's](https://www.investopedia.com/articles/markets/032015/how-mcdonalds-makes-its-money-mcd.asp) restaurants in more than 100 countries, and 93% of them are owned and operated by local business people.

The company was founded in 1940 by the McDonald brothers in San Bernardino, California. However, it was their business associate Ray Kroc who opened the first official franchise in 1955 in Des Plaines, Illinois. Kroc later bought the business from the brothers.

The success of McDonald's franchise story is partly a result of the company's commitment to maintaining consistent standards in its food. A Big Mac in Los Angeles should and does have the same quality as one in London.

McDonald’s either owns the land and buildings or secures long-term leases for the franchised sites, and it only considers franchisees who have at least $500,000 in non-borrowed personal resources. The franchisee agrees to pay part of the cost of seating, décor, and signs. Franchisees also manage their own pricing decisions and staffing while benefiting from the brand equity and global experience of McDonald’s.  

## Does a Franchisee Own a Business?

Yes, a franchisee is the owner of the business. The owner is licensed to use products supplied by the franchisor. The franchisee is contractually obligated to use only products and services supplied by or authorized by the franchisor.

This limits the business owner's scope and autonomy. A McDonald's franchisee cannot sell a peanut butter and jelly sandwich or even hang a picture on the wall that isn't issued by McDonald's.

## Is a Franchisee the Same As a Franchisor?

No. The franchisor is the entity that owns the intellectual property, patents, and trademarks of the brand or business being franchised. A franchisee buys the right to operate a location of the franchisor.

## Can a Franchisee Be Fired or Removed?

A franchisee can effectively be fired. The franchisor can shut down one of its licensed operators that breaks the rules. Those rules allow the franchisor to act quickly if a franchisee is discovered to be running a location that fails to meet health and safety guidelines, among other infractions.

## The Bottom Line

The franchise model is expanding in new directions. The classic is the McDonald's model in which a business person adopts the entire product line and merchandising model of a franchisor. Other companies such as Domino's Pizza, Burger King, Jiffy Lube, and RE/MAX also offer well-known franchise opportunities.

Newer franchising models are emerging, particularly in services businesses such as home healthcare and tax preparation. There also is growth in business distribution franchises. This is a supplier/dealer relationship in which the dealer acquires exclusive rights to sell a supplier's goods within a certain area.

But, franchising isn't for everyone. Being a franchisee is best suited to an individual who wants to buy into a proven business model and not invent one from scratch.

> **Article Sources**
>
> 1.  Franchise Business Review. "[Franchise Business Review Announces 2023 Most Profitable Franchises](https://tour.franchisebusinessreview.com/posts/franchise-business-review-announces-2023-most-profitable-franchises/)."
>     
> 2.  McDonald's. "[Franchising Overview](https://corporate.mcdonalds.com/corpmcd/franchising-overview.html)."
>     
> 3.  McDonald's. "[Our History](https://corporate.mcdonalds.com/corpmcd/our-company/who-we-are/our-history.html)."
>     
> 4.  McDonald's. "[Can You Still Get a McDonald's Franchise (in the United States) and How Much Does It Cost?](https://www.mcdonalds.com/us/en-us/faq/can-you-still-get-a-mcdonald-s-franchise--in-the-united-states--and-how-much-does-it-cost.html)"