Initially, franchising’s greatest appeal was as an opportunity for an individual to control their own destiny and secure their future. Franchising began as a way for an independent-minded business person to buy a career or job. In recent years, that model has shifted, to an opportunity for wealthier investors to buy many units or the rights to develop or represent a geographical area or “territory” and develop a number of units. The five types of current, conventional franchising is listed below.
1. Single-Unit Franchises
Single-unit franchises operate one location of the franchise. Until recently, owning and operating just one franchised location was the most common form of franchising relationship.
2. Multi-Unit Franchises and Area Developers
Multi-unit franchisees have become more common today in franchising. Multi-unit owners account for more than half of all franchised units in the U.S. today.
Multi-unit franchisees possess the right to open a specific number of locations within defined territories, during a fixed period of time. In addition to signing a franchise agreement, an area developer signs a development agreement. The development agreement grants the multi-unit franchisee the exclusive right to open multiple locations. Each location opened by a multi-unit developer has a separate franchise agreement, as the development agreement is not a franchise agreement.
3. Master Franchising
A master franchise relationship looks similar to a multi-unit franchisee, but it has one significant difference. Via a master franchise agreement, the master franchisee possesses both the right to open and operate a number of locations in a defined area themselves, PLUS a master franchisee possesses the right to offer and sell franchises to other parties in that particular area for a particular period of time. A master franchisee is typically required to own and operate at least one location themselves.
Per a master franchise agreement, the master franchisee pays the franchisor a franchise fee that reflects potential sites. The master franchisee also provides all opening and maintenance support needed by the franchisees. In exchange, a master franchisee collects a franchise fee from each franchise recruited, and keeps a percentage of the royalties the sites they recruit pay to the franchisor; the percentage may vary.
A master franchise agreement is more complex, because the terms specify the responsibilities of the master franchisee to support the unit franchisees. A master franchise generally provides all support to the franchisees it recruits.
Master franchisees also possess obligations typical of a franchisor. Each master franchisee is required to register and file their own government filings and Franchise Disclosure Documents.
Master franchising is the most prevalent method used by U.S. franchisors to franchise in new countries.
4. Area Representatives
An area representative relationship looks similar to a master franchise relationship, with one major distinction. The area representative does not enter into any franchise agreement with the unit franchisees. The unit franchisees sign a franchise agreement with the franchisor directly.
An area representative is, in reality, a franchise salesperson and commissioned field support representative for a specific geographic area. The area representative pays the franchisor a fee to enter into the relationship as an area representative, and shares with the franchisor the franchise fees and royalties paid by the franchisees opened in their territory. The area representative provides the franchisees in their territory opening support and some maintenance support.
As with multi-unit and master franchise relationships, the area representative agrees to establish a specific minimum number of units, during a specified time period, in a defined territory. The difference between a master franchise relationship and an area representative is that the master franchisee signs an agreement with each sub-franchisee, while the area representative does not. The area representative also does not need to register or file any government filings or Franchise Disclosure Documents.
5. Existing Franchises
People can also buy existing locations from the franchisor or an existing franchisee. They are essentially purchasing a functioning, “used” version of the franchise: Some benefits to this often include the following:
- The business is already operating, so the buyer does not have to select or construct and equip a location.
- An established, operating business may be easier to finance, which may help finance the acquisition.
- The seller may be motivated to sell quicker or at a lower price.
- The site already has trained staff, and a history that a buyer can use to project value.
By Steve Longo and Jim Notaris