Franchise Development Formats and Agreements

Franchising offers a range of development formats and agreements for the franchisee

When you buy into a franchise system you sign a franchise agreement that spells out specifically which development format you are buying. It could be one franchise store or possibly the right to build several store locations, or you may be looking to buy the rights to own all the stores in a particular geographic area. Not only can you buy the rights to a geographic area, but you can also buy the rights to sell franchises to others in your geographic area.

Each development format involves a different type of agreement

The offers to buy a franchise must comply with the Federal Trade Commission (FTC) standards for a Uniform Franchise Offering Circular (UFOC), and even under the rules of the UFOC there are different types of franchise agreements you can be offered. These agreement types include single-unit franchises, multi-unit franchises, area-development franchises, and master franchise/sub-franchise.

Development formats and agreements in franchising can be divided into two broad categories: Single-unit franchising and Multi-unit franchising

Single-unit franchising: an arrangement by which the franchisor licenses the franchisee to operate the business from a single outlet. Single-unit franchising is the most common form of franchise and gives the franchisor the greatest degree of flexibility and control over the franchise system.

Multi-unit franchising: an arrangement by which the franchisor licenses the franchisee to operate the business through multiple single-unit outlets based on a development schedule. Multi-unit franchising is becoming more common as it maximizes the franchisee’s profit potential and allows the franchisor to expand the brand in a specific territory. Successful franchisees often look to buy more than one franchise unit from the same franchisor.

Be sure you understand how the purchase of another franchise unit from the same franchisor might impact your current successful unit/s. Be aware of a common clause called a cross-default (a franchisee found to be in violation of a franchise provision at one of his single-unit outlets will be considered in violation for all of his agreements). Always, review the franchise agreement with an attorney/lawyer who specializes in franchise contracts before signing any related documents.

Area development franchises

Franchisors – particularly those in more capital-intense industries such as lodging, restaurants (dining room and quick service), and automotive rental – sometimes recruit entrepreneurs with proven business experience and substantial capital resources who are willing to establish multiple franchise outlets in a defined market area over a prescribed time period. These people have often operated one or more franchises within the franchisor’s system or another franchise company, and have organizational and financial resources sufficient to commit to a large-scale investment.

The franchisor may be willing to grant franchise rights for relatively large market areas, within which a number of outlets will be established by the area developer.

The goal of these multiple-franchise arrangements is to achieve the same degree of market coverage through either unit franchising or direct development by the franchisor.

A multi-unit franchisee may pay an up-front franchise fee (at a discounted rate) for each franchise unit that they will open. In a multi-unit franchise (sometimes called an area development franchise or simply an area franchise), the franchisor and the franchisee sign an area-development agreement that dictates the timing of unit development and openings by the franchisee. They also sign a separate unit-franchise agreement, which governs the operation of each outlet that the franchisee opens in his or her area.

Master franchise/Sub-franchise

When franchisors want to expand into new regions, or even internationally, they often choose to use some form of multi-level franchising.

Although there are several variations on multi-level franchising, master franchisees, also known as sub-franchisors, have the right to grant unit franchises to third parties.

Multi-level franchising strategies are generally motivated by geographical factors. Having a master franchisee on the ground and close to third party franchisees mean they can communicate face-to-face with them more frequently. It also means the master franchisee is well acquainted with the competitive forces at play in the local market.

What’s right for you?

A franchise systems maturity, geographical base and type of product or service all have an impact on how the system will evolve and grow over time.

In some newer franchise systems, franchisees start out owning one unit and progress to more extensive franchise holdings. In other cases, established systems have made the leap to new countries and regions by granting rights for a large territory to an experienced businessperson who has the financial and business background to develop and expand a well-known franchise system.

The sheer diversity of franchising – the wide range of concepts and differing strategies for expansion and development formats – ensure that franchising will continue to provide new business opportunities well into the future.

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