One of the great visions of franchising is to pass onto the franchisee the ability to be successful. By following a franchise’s proven systems, franchisees are able to capitalize upon the experiences and R&D the franchisor has developed, as well as increase their chances of entrepreneurial success and profit. How big or small the franchisee would like to be, is restricted only by the type of agreement they engage in with the franchisor.
Single- Unit Franchises:
A single unit franchise is one in which the franchisee obtains the rights from a franchise system to operate ONE franchise. This is a standard franchise format which generally involves the least amount of initial financial investment.
You can, however, go bigger…
Multi-Unit or Area Development Franchises:
A multi-unit, or Area Development franchise, is one in which a franchisor grants a franchisee the right and the obligation to open more than one location within a set period of time, for the exclusive development of a particular area. This exclusive development also involves the franchisee acting as a commissioned franchise sales and field-support person within their geographic area. An area developer may or may not own and operate a franchised unit in the territory granted to them.
This means that for each franchise the area developer sells, the franchisor pays them a commission usually based on a percentage of the franchise fee paid to the franchisor, and then they provide opening and continuing support to the franchisees earning a percentage of the royalty paid to the franchisor. The area representative conversely, pays the franchisor a market development fee for the opportunity of developing and servicing a specific minimum number of units, following a development schedule in a defined territory.
This type of relationship has significant advantages for both the franchisor and the multi-unit franchisee.
Advantages to the Multi-Unit franchisee:
1) The initial franchise fee for the new location may be a reduced fee from the franchisor’s standard fee.
2) The franchisor may have a different royalty fee for multi-unit developers than they do for single unit providers.
3) A portion of the fee paid for the development rights may be credited to the initial franchise fee the franchisee owes for each location.
4) If they are in a food industry, the franchisee can often combine some of the preparation of products into a central commissary or kitchen.
5) The franchisee may save on freight and other costs by buying in greater quantities at a lower cost and storing their inventory into a centralized warehouse.
Advantages to the Multi-Unit franchisor:
1) Because each multi-unit franchisee is opening more than one location, the cost of acquiring a franchisee on a per-unit basis is lower.
2) Because fewer franchisees exist, the cost of serving a multi-unit franchisee is generally lower on a per-unit basis.
3) A multi-unit franchisee is obligated to grow the market, and controlled growth leads to better planning for advertising and better leveraging when negotiating with suppliers and other vendors.
4) The area developer franchisee can often control the market they are in, so coordination of local advertising and promotions is easier than having to work with all the other franchisees.
5) The franchisor benefits from the close proximity of supervision and support provided by the area developer.
Master Franchising:
As with a multi-unit, or Area Development franchise, a Master franchise presents the franchisee with an expanded number of revenue centers, such as a commission from franchise fees paid to the franchisor for sales in particular geographic areas, ongoing royalties from franchises sold by the Master franchisee, and products or additional services, such as consulting.
In this franchise environment, the Master franchisee’s main job is to act as a business consultant to their franchisees and help them succeed in their own business, as opposed to providing a service such as selling hamburgers to a consumer in a retail environment. Understandably, a Master franchisee is generally required to own and operate at least one or two locations themselves – After a set period of operation time, the Master franchisee is allowed to sell the rights to open additional locations to other franchisees – these are called sub-franchisees.
Differences:
The principle difference between an area developer and a master franchisee is that a Master franchisee signs an agreement directly with his sub-franchisees, whereas the area developer doesn’t enter into a contractual relationship with the franchisees – those franchisees sign agreements directly with the franchisors as in the single-unit and multi-unit development agreements. Although the exposure of legal liability is greater with a Master franchise, the control of development is stronger than that of Area Developers. Furthermore, unlike an area developer, Master franchisees usually have the option of either opening units themselves, or of selling unit franchises to third parties.
Recap:
A single unit franchise is one in which the franchisee obtains the rights from a franchise system to operate ONE franchise.
In a multi-unit, or Area Development franchise,
- The franchisee will pay a franchise fee for the development rights of a particular area
- The franchisee agrees to open and operate X number of units over X period of time
After owning and operating one or two franchises, a Master franchisee is granted permission to sell and coach sub-franchisees within their designated geographical area. A Master franchisee’s main job is to act as a business consultant to their franchisees and help them succeed in their own business, as opposed to providing a service such as selling hamburgers to a consumer in a retail environment.
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