The choice of franchise structure will impact a number of factors that will further define your franchise organization
Taking up franchising is one of the easiest ways of venturing into the business world. While creating a franchise plan, you need to decide on a suitable franchise structure for you. The choice of franchise structure will impact a number of factors that will further define your franchise organisation, such as targeted franchisee, support requirements, staffing, and cost structure. Hence, one shouldn’t venture into the franchise business without some forethought and thorough research.
Making a choice between the different possible structures depends very much on the particular circumstances of the franchisor and the franchisee, as well as the nature of the franchise. Several factors should be taken into consideration, including:
- the franchisor's reasons for franchising;
- the size and resources of the master franchisee or franchise developer;
- the resources of the franchisor; and
- the nature of the market to be served (including its location–foreign or domestic, and its relative importance to the franchisor)
Here are the most common franchise structures to guide in choosing the best one for you.
There are basically two types of franchising arrangements:
- Area development
- Master franchise (sub-franchising)
Unit franchising is the most straightforward way in which franchising can be carried out because the franchisor grants a franchise the rights to open and operate one franchise unit. It involves direct relations between the franchisor and the franchisee, whereby the franchisor enters into a franchise agreement directly with the franchisee. It is possible, however, for a franchisee to purchase additional single-unit franchises once the original franchise unit begins to prosper.
A multi-unit franchise is an agreement where the franchisor grants a franchisee the rights to open and operate more than one unit. There are two ways a multi-unit franchise can be achieved: an area development franchise or a master franchise.
- Area Development Franchise
A franchise developer agreement links the franchisor directly with the franchisee, who is then expected to open and operate several units. The franchisee has the right to open more than one unit during a specific time, within a specified area. Under an area development franchise, the franchisee is required to develop the assigned territory by establishing a number of franchise units or outlets which he will usually own directly. For example, a franchisee may agree to open 5 units over a five-year period in a specified territory.
- Master Franchise
A master franchise agreement grants the franchisee the rights (which may be exclusive) for a given geographical area. In addition to having the right and obligation to open and operate a certain number of units in a defined area, the master franchisee is also given the right, by the franchisor, to grant franchises to third parties, usually called "sub-franchisees". Therefore, the master franchisee takes over many of the tasks, duties and benefits of the franchisor, such as providing support and training, as well as receiving fees and royalties.