What is a Franchisor?

A company or organization that gives others the opportunity to start and operate a business using its brand, trademarks, products and processes in exchange for a franchise fee and ongoing fees. Franchisors must comply with the FTC Franchise Rule by maintaining an updated Franchise Disclosure Document and registering to sell franchises in states that require it among other obligations.

The person who purchases the rights to operate their own business under the franchisor’s brand and business model. Franchisees categorized as single-unit or multi-unit owners. If you’re looking to invest in a franchise opportunity, this is you!

This is the initial amount franchisees pay a franchisor when signing a franchise agreement to join the brand. This initial fee is explained in-depth in Item 5 of the Franchise Disclosure Document (or FDD) These can vary from company to company as a flat fee or a variable fee based on the size of your territory and other factors.

Under federal law, all franchisors in the United States are required by the Federal Trade Commission to furnish an FDD to prospective franchisees. FDDs are typically updated each year and include 23 Items explaining the company’s history, litigation and bankruptcy history, all fees and costs associated with the opportunity, initial startup costs,  contractual obligations, and unit or system-wide financial data among other important information about the franchisor, the franchisor’s affiliates, and the managing executives.

This is the written contract that is an exhibit to the FDD outlining your responsibilities as a franchisee and the franchisor’s responsibilities to you. The franchise agreement governs the relationship between franchisees and franchisors. This is the single most important document signed by franchise investors and should be reviewed by experienced franchise counsel so franchisees understand their rights.

This explains how long your franchise agreement will be valid. Typically, franchisors set the term of agreement somewhere between five and 20 years. When a term expires, franchisees doing well are given the opportunity to renew their agreement. The obligations of franchisees to obtain renewal or a successor term is set forth in the franchise agreement.

Many franchisors require their franchisees to pay a regular fee. More often than not, this is calculated as a percentage of sales, but sometimes it’s flat. Most franchisors set their royalty fee within the range of 5 to 9 percent of gross revenue. Franchise investors and developers should carefully review all fees charged by the Franchisor.

Also referred to as an initial investment, this is the total amount required to open the new franchise. Details about these costs are explained in Item 7 of the FDD. Startup costs include the initial franchisee fee along with any other initial expenses specific to the business such as equipment, real estate (if your franchise requires a physical location), insurance, leasehold improvements (if applicable), permits, licenses and more.

These are locations that are both owned and run by the company itself or an affiliate of the Franchisor. In other words, they’re not franchised. You can better understand how many company-owned units and franchised units exist in a franchise system in Item 20 of the FDD.

These are the states that require franchisors to register their FDDs with a state government agency before selling their franchises to new business owners. Registration states include New York, California, Illinois, Minnesota, Maryland, Virginia, Michigan, Indiana, North Dakota, South Dakota, Hawaii, Washington, Wisconsin and Rhode Island. Other states have notice or business exemption filings and fees required to be paid before you sell. 

Some franchise buyers are interested in opening multiple locations over a particular span of time. They may choose to open and operate multiple locations themselves or hire other franchisees to take control. Thes relationships are often governed by a development agreement which has a development schedule (the number of units to be opened before certain future dates) and a development area (the area of land where the units will be developed). The development agreement should be an exhibit to the FDD.

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