Entrepreneurial Blog

What is typically provided by a franchisor to its franchisees? Why would these be valuable to a nascent entrepreneur? Why is the failure rate lower for franchisees than it is for independent businesses?

Typically a franchisor provides branding, training, marketing, products, supplies, and a proven way of doing business.  Branding is name, logo, product, or service that is specific to a company.  The brand name McDonalds brings to mind a hamburger joint.  The brand name Taco Bell brings to mind a fast food place to eat tacos and other Mexican items.  When one sees the symbol for Taco Bell one knows that they can have a taco, burrito, taco salad, or one of their other specialties.  People associate a brand with a particular product, part of the franchisee’s marketing is done with branding.  The franchisor will provide training for the franchisee.  This would include from design of the building to placement of the equipment to full in-depth training of the crew on the exact methods to produce the end product for the customer.  For a Taco Bell franchises this would include the exact type of building to building including shape and colors to how to set up the interior.  Crew members will learn the proven method to cook each food item as well as how to package and present to the customer.  the franchisor will also provide the exact product and ingredients for their product.  The franchisors will provide the Taco Bell franchisee with the specific foods and ingredients to prepare the Taco Bell menu, this will ensure that all Taco Bell’s have the same food and that the quality will remain consistent throughout the franchisees and company owned stores.  The franchisor also provides a proven method of doing business.  Many Taco Bells are successful and continue to be profitable by following the franchisor’s proven methods.

These would be valuable to a nascent entrepreneur because of the proven way of doing business and the proven profit potential.  Many franchisors may also test out new products or services at their company owned stores then after successful then move the new product or services to the franchisee.  This will eliminate costly mistakes for the franchisee as problems will be delimited before hand.

The failure rate is lower for franchisees than it is for independent businesses since the franchisor had already proven to have a successful model.  Many mistakes have already been made and rectified making a franchisee more profitable.  The franchisor also has a stake in making sure the franchisee is successful since the franchisor will make money off the franchisee in either franchise fees, share of the profits, or both.  Because the franchisor also has an investment in the franchise the franchisor will try to do everything they can to see that the endeavor is profitable.

What is the difference between a franchisee and a company owned store within a franchise chain? Why might one prefer to be the franchisee or the manager of a company owned store?

The difference between a franchisee and a company owned store is that the franchisee pays a franchise fee to the franchisor, keeping the profits or losses  (after any additional commission paid to franchisor if any) with the franchisee while the company owned store does not pay any fees and all of the profits and losses remain solely with the franchisor.  The franchisee is responsible for all personnel and operating decision of its store while the company owned store has the vast knowledge of the franchisor to make these decisions.

One might prefer to be the franchisee over the manager of a company owned store is the possibility of financial profits and the franbshciss’s dreams being realized.  But one might not want to take the risks of having a franchisee and the possibility of a loss and chose to be the manager of a company owned store.

To have a Taco Bell franchisee one needs to pay $1,200,000 to $1,700,00 in franchising fees along with the costs of land, building, and equipment.  The franchising agreement is almost impossible to financing and it has a 20 year term.  After 20 years as a Taco Bell franchisee you have to pay another franchisee fee or lose your Taco Bell designation.  There would probably also be in your contract a clause that did not allow you to open another restaurant or Mexican type restaurant in your location even if you own the land and the building outright.  It is profitable to have a Taco Bell franchisee in many areas as Taco Bell has risen to one of the most profitable companies.  Taco Bell (Yumi Yumi Brand) also offers expensive branding and training programs for one to be successful.

If one did not have the large investment required for a franchisee like Taco Bell and they did not want to risk their investment then being a manager of a company owned store is more appropriate.  The manager of the company owned store is guaranteed a salary and most times they also share in the profits.  Personnel can be provided from corporate and help is readily available for the manager of a company owned store.