THE 4 TYPES OF FRANCHISE STRUCTURES
- · Area Developer [AD] - The right to open and operate multiple units within a designated geographic area. ...
- · Area Representative [AR] - The right to recruit third parties as unit franchisees, and/or provide support to third parties entering into unit agreements. ...
- · Sub-franchisor [Sub]—Grants unit franchises to third parties within a designated territory. ...
How to choose the right franchise structure?
- What speed of growth is required to meet your goals?
- What is your return at the unit level?
- How much support can you provide to your franchisees?
- Does your business lend itself to passive ownership?
- Are you able to cluster units effectively?
- How fragmented is the competitive market?
- What is the degree of competition for your targeted franchisee?
What are the basics of a franchise?
- The franchisee pays fees to the franchisor. ...
- The franchisor must have significant control over operations. ...
- While the franchisee may own a franchise, the services and products provided by the business are associated with the franchisor’s trademark.
What is the legal structure of a franchise?
The most common legal structure options are S-corporations, C-corporations, sole proprietorships, general partnerships and limited liability companies. S-corps are becoming more popular in recent years among franchisees due to the tax benefits afforded to smaller businesses with fewer stakeholders.
What are franchise relationship structures?
Understanding Franchise Relationship Structures. Franchising, at its core, is a way for a company to expand and distribute its products or services. In “Traditional Franchising,” product manufacturers use a downstream distribution system to get their products to market. In “Business Format Franchising,” companies sell the rights to use ...
How are most franchises structured?
Determining the proper legal entity is a key factor that needs to be designated well before signing a franchise agreement. The most common legal structure options are S-corporations, C-corporations, sole proprietorships, general partnerships and limited liability companies.
What are the 4 types of franchise arrangement?
Below are four types of agreements franchised businesses commonly form.Single-Unit Franchise Agreement. In a single-unit agreement, the arrangement grants the franchisee the right to open and operate a single franchise unit. ... Multi-Unit Franchise Agreement. ... Area Development Franchise Agreement. ... Master Franchise Agreement.
What are 5 characteristics of a franchise?
5 Characteristics of a Profitable FranchiseGOOD LOCATION:FRANCHISOR'S SUPPORT.PROVEN TRACK RECORD.ESTIMATED BRAND REPUTATION.GOOD MEDIA RELATION.
How do franchise models operate?
Franchising is a business model where one company (the franchisor) owns a brand and offers a license to others (franchisees) so they can sell the products or services under that brand for a defined period of time. The franchise business structure offers would-be business owners the best of both worlds.
What are the 3 types of franchise agreement?
Types of Franchise AgreementSingle Unit Franchise Agreement. This is the traditional and most common form franchising. ... Multi-Unit Franchise Agreement. ... Master Franchise Agreement.
What makes a good franchise model?
What makes a good franchise is an agile yet strong and supportive infrastructure. All franchisees need initial training when they start. Even if they have experience, they'll still need to learn the ropes of your operating model. Providing ongoing training ensures standards are maintained and benchmarks are met.
What makes a successful franchise?
A highly successful franchisor is dedicated towards its brand. Running a franchise requires a strong drive and motivation for success. Your devotion towards your franchise will deliver a positive brand experience to the customers. A brand's success depends on the customer's way of perceiving it.
What are the elements of a franchise?
The 5 Elements of a Successful FranchisePowerful business systems. A franchise without a business system isn't a franchise. ... Serious brand power. ... Innovation. ... Powerful franchisee training. ... Wealthy franchisees.
What are the 4 types of franchising and give an explanation about it?
Learn the 4 main types of franchise arrangements: single unit, multi unit, area developer and master franchise. The franchising industry is very versatile, with multiple franchises, industry options and investment ranges. In addition, there is a diversity of types of franchise arrangements available.
What is the most common type of franchise agreement?
single unit franchiseA single unit franchise is an agreement where the franchisor grants a franchisee the right to open and operate one franchise location. This is the most common and simple type of franchise relationship.
How many types of franchise agreements are there?
There are 4 basic types of franchise agreements: Single-unit, multi-unit, area development and master franchising. A single-unit franchise is the most common and is simply where a franchisor grants a franchisee rights to open and operate one single franchise unit.
What are types of franchise?
The five major types of franchises are: job franchise, product franchise, business format franchise, investment franchise and conversion franchise.
Why is the master franchisee structure used in international markets?
One reason this structure is frequently employed in international markets is that of the reduced franchisor interaction. You're instead relying on the master franchisee to provide regular training and support to the individual franchisees.
How does an area development franchise work?
In this franchise structure, the area developer signs a single franchise agreement for the rights to a predefined number of individual locations, which must be opened within a fixed amount of time. For instance, an area developer may sign a 10-unit contract for Dallas, Texas with the obligation that all 10 units must be open in no more than five years. The details of these agreements often vary from franchise to franchise, but all will have three predefined elements: number of units, territory and timeline.
Why are master franchising and area representative agreements not recommended for emerging franchisors?
Because master franchising and area representative agreements are highly complex and require a deep understanding of the inner workings of the franchise industry, especially from a legal perspective, these structures are not recommended for emerging franchisors. It's best for new franchisors to start at the individual level and introduce additional structures as the company grows and matures.
What is master franchise?
Master franchising , a structure most common in international markets, is an agreement in which the master franchisee is granted exclusive rights from the franchisor to sell individual franchises, often in a protected territory. Through this structure, the master franchisee collects a portion of the franchise fee in return for providing ongoing support to the individual franchisees, creating a responsibility buffer for the franchisor whose contractual obligations are only with the master franchisee.
What is single unit franchising?
While multiunit deals, area development agreements and conversions are attractive structures for franchisors, single-unit franchising is typically the recommended structure for most emerging franchisors. Individual franchise investors and owner-operators are often easier to target, and they can lend the best insight to help a franchisor understand what type of support future franchisees may need. Single-unit franchising also offers a franchisor the most control over franchise operations, and it helps you more easily identify which franchisees are performing well enough to potentially open additional locations.
What are the variables that you may encounter during the structuring phase?
Some variables you may encounter during the structuring phase include things like: Who is your target franchisee? What kind of support will they require? What sort of staffing demands will their operation produce? Further, the structure you choose will also influence your costs as you build your organization. So, be sure to allow yourself time for due diligence and thorough financial modeling.
What is Forbes Coaches Council?
Forbes Coaches Council is an invitation-only community for leading business and career coaches. Do I qualify?
What is a franchising business?
Franchising is a popular tool to scale business operations worldwide and accounts for a large portion of the U.S. market.
What is a franchise agreement?
A franchise is an agreement between two independent parties: the franchisor and the franchisee. One party (the franchisor) offers its business model, brand name, and intellectual property to another party (the franchisee) that will use the resources to start a business according to the existing system.
How does a franchisee get royalties?
First, the franchisee purchases the controlled rights and intellectual property from the franchisor business, paying a lump sum contribution or a one-time fee. Secondly, the franchisor is paid by the franchisee for training, equipment, and business advisory services. In the end, the franchisor receives royalties every month.
What is franchising in the US?
Small businesses in the US use the franchising model to grow into national chains and gain a foothold in other locations such as Europe, Canada, and China. On the other hand, overseas franchisors turn to franchises to establish themselves in the US market, using funds provided by the franchisees in the US mainland.
What is gross income in a dealership?
Gross Income Gross income refers to the total income earned by an individual on a paycheck before taxes and other deductions. It comprises all incomes. ) with the franchisor as specified in the contract.
How much does it cost to franchise McDonald's?
Taking McDonald’s as an example, the estimated total costs to launch a franchise range from $1 million to $2.2 million. When it comes to royalties, the franchisee needs to remit 4%-8% of its revenue to the franchisor per month.
What is the FTC?
The Federal Trade Commission (FTC) serves as a federal regulatory body that aims to protect consumers and ensure strong competition in the markets. The Franchise Rule, which is published by the FTC, represents a legal disclosure conveyed to a potential buyer of the franchise from the franchisor.
What are the four strategies used to grow franchised brands?
Consider four strategies used to grow franchised brands: individual location (one at a time), multi-unit development, master franchising, and area representative.
What is the role of a master franchisee?
The master franchisee must also set up an infrastructure for being a subfranchisor including operational support, training, marketing, etc. Additionally, the master franchisee must absorb the administrative burden of preparing and implementing a franchise disclosure document (for territories in the U.S.) and coordinating it with the master franchisor.
Why do franchisors grant only one location?
Additionally, to foster a high level of operational excellence, some franchisors grant only one location to a new franchisee in order for the franchisee to first prove his operational capabilities before being considered for multiple locations.
Is front end work more involved?
Although the front-end work will be more involved and will need to be completed before you get out of the gate, for some franchise systems this may be the best strategy.
Is there a one size fits all strategy to building a strong culture?
There is no one-size-fits-all strategy to building a strong culture, but there are many paths to success and many ways to win the race.
Do franchisees pay upfront?
Typically, franchisees pay an up-front fee, which may be a percentage of the initial franchise fees for the locations to be developed or a lump sum to compensate the franchisor for setting aside the territory .
What is the relationship between a franchisee and a franchisor?
The Relationship Between a Franchisee and Franchisor. Similar to a consultant and its clients, a franchisee and franchisor have a mentor-like relationship. The franchisor provides guidance and support throughout the operations of the franchisee’s business, including staffing, set-up, marketing.
What is a franchisee?
Summary. A franchisee is a small business that operates under the trademark of a parent company, also known as the franchisor. Throughout inception, the franchisee receives guidance, consultation, and support from the franchisor regarding internal operations, such as hiring, marketing, corporate strategy, and more.
Why do entrepreneurs enter into franchises?
Oftentimes, entrepreneurs with little experience tend to enter into a franchise for the following reasons: The cost of opening a franchise is lower than initiating a new start-up; thus, there is less initial outlay that must be put upfront.
Why do people start franchises?
Oftentimes, entrepreneurs with little experience tend to enter into a franchise for the following reasons: 1 The cost of opening a franchise is lower than initiating a new start-up; thus, there is less initial outlay that must be put upfront. 2 Franchisees receive the appropriate support and guidance from the franchisor to succeed.
Who is the main operator of a franchise?
The franchisor, who is the main operator of the business, can sell the right to other potential business owners to use its name and idea to operate their own business. The franchisee is the individual who buys into the franchisor ’s existing business model and trademark to gain the right to sell the franchisor ’s goods or services.
Who was the first franchisee of KFC?
His first franchisee was Peter Harman, who owned a hamburger shop in Salt Lake City, Utah. Over the years, Sanders persuaded many other restaurant owners to add KFC to their menus.
What is a subfranchisor?
Subfranchising is a technique whereby a franchise system grants to another person (the “subfranchisor”) the right, in a specific territory, to exercise powers normally reserved to the franchise company. The subfranchisor may be an existing franchisee or, in some systems, a person unrelated to the system. Some franchise companies will require their subfranchisors to operate at least one unit, while other franchise systems will prohibit the subfranchisor from engaging in such activities. The subfranchisor ordinarily has the right to offer and sell franchises (sometimes subject to a schedule or quota), to sublicense the use of the franchise system’s trademark, to collect franchise fees, and to provide certain services to franchisees. Generally, the subfranchisor undertakes services of a regional or local nature, while the franchise company assumes broader responsibilities such as national advertising and annual conventions.
What is area representation?
In an area representative arrangement, the so-called “area representative” is given the right to solicit prospective franchisees, and to provide certain services to existing franchisees, in a stated territory. Unlike the case in subfranchising, however, the area representative has no right to contract with franchisees. All franchise agreements are entered into directly between the franchise company and the franchisee. In this fashion, the franchise system assumes all responsibilities to the franchisee, but delegates some of those responsibilities to the area representative. For example, the area representative, in addition to soliciting for prospective franchisees (which is, ordinarily, subject to a schedule or quota), might have responsibilities for training franchisees, periodic inspections, local or regional advertising and periodic consultation.
Single-Unit Franchises
Multi-Unit Or Area Developers
Master Franchising
- A master franchiserelationship can look very similar to a multi-unit development structure but has one significant difference. Under a master franchise agreement, in addition to having the right and obligation to open and operate a number of locations in a defined area, the master franchisee also has the right and the obligation to offer and sell franchises to other people looking to become fr…
Area Representatives
- An area representativerelationship looks very much like a master franchise relationship, with one major distinction. The area representative does not enter into any agreement with the unit franchisees. The unit franchisees sign a franchise agreement with the franchisor directly. The area representative is, in reality, only a commissioned franchise salesperson and also the comm…
Other Franchise Options
- There are other franchise structures used less frequently in franchising: 1. A conversion franchise is a relationship established with an existing independent operator, in the same general business as the franchise system, that agrees to sign a franchise agreement and convert their business into a franchise. 2. Non-traditional locations are those g...
Existing Franchises
- One method of becoming a franchise that I personally like is buying an existing location from the franchisor or one of their franchises that want to exit the system. There are several advantages to buying a “used” franchise: 1. You are in business faster, because you don’t have to find the location or work through constructing and equipping the business. 2. Bank financing may be eas…
How Does Franchising Work?
- Franchising is a marketing strategy and is currently a very popular tool used for business expansion purposes. When a company with a proven business modelwants to scale its operations by increasing its share in certain markets, it can consider opening a franchise for its products or services. A franchise is like a joint venture between the company wanting to expand the busines…
Real-World Examples
- The franchise business model is popular in highly competitive industries such as the fast-food industry, video rentals, and automotive services. The model first appeared in the US after the Civil War, and it gained popularity in the 1950s and 1960s through to the 1990s. Large companies such as McDonald’s, Dairy Queen, Taco Bell, Denny’s, Jimmy John’s Gourmet Sandwiches, Subway, 7-…
Franchising Requirements and Regulations
- Since franchising is a contractual arrangement, it involves a lot of bureaucracyand complex contracts. However, the complexity of the paperwork varies across franchisors. The agreement typically includes three categories of payment and the amounts the franchisee needs to transfer to the franchisor. First, the franchisee purchases the controlled rig...
Franchisor vs. Franchisee Relationship
- The relationship between the franchisor and the franchisee is that of an advisor and advisee, where the franchisor provides guidance to the franchisee on how to structure the business. Each of the parties has a role to play and interests to protect in the arrangement. The following are the roles of each party in the contract:
Disadvantages of Franchising
- Apart from the advantages, franchising comes with several drawbacks, such as relatively heavy start-up costs, followed by royalties. The costs are often dependent on the kind of business and franchise you are going to buy. Taking McDonald’s as an example, the estimated total costs to launch a franchise range from $1 million to $2.2 million. When it comes to royalties, the franchis…
Additional Resources
- CFI offers the Financial Modeling & Valuation Analyst (FMVA)™certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful: 1. Brick and Mortar 2. Market Positioning 3. Strategic Alliances 4. Total Addressable Market (TAM)