Basic Franchise Relationship Structures

Franchising is a popular and successful way to expand a business and/or distribute products and services. Traditional franchises focus on product distribution. For example, a tire service shop may hold a Goodyear Tires franchise. The services provided and how the operation runs may have little to do with Goodyear. The business simply has a franchise agreement to sell Goodyear Tires.

Another popular franchising system is often called brand franchising. In this system, the franchisee not only distributes products, but does so through a required, predefined delivery system. This is also called business format franchising. Most fast food franchises are examples of brand franchising.

In traditional franchising, the product is central to the franchise; in business format franchising, the system of delivering the product or service takes center stage.

In these two popular franchise systems, as in most others, the relationship between the franchisee and the parent company, also called a franchisor, is based on a central contract called a franchise agreement. The franchisee sells the products and services as specified by the franchisor; the franchisor is focused on growing and supporting their franchise system.

Most people are familiar with franchising, and the basic structure of the franchising relationship, because they have grown up doing business with many examples. But franchising goes beyond the local fast food restaurant location. Let’s look at the popular franchising relationship structures in operation today.

The Single-Unit Franchise

The oldest and most simple example of a franchise relationship is a small business owner who enters into an agreement to operate a single unit of a parent company’s franchise. For example, you own and operate a single branch of a popular franchised fitness center. This is still a common and wonderful way to invest in owning your own business.

For the parent company, opening single franchises with individual owners can be a slow and costly way to expand your business. Each individual unit must be fully supported. Single franchise owners are not as quick to take risks to grow their operation. They like to move slowly, so as not to risk the single business that provides their livelihood.

Multi-Unit Franchisors or Area Developers

A growing trend is the multi-unit franchisee, who owns and operates more than one franchise unit, often from the same parent company; some even own units from different franchisors in multiple industries. Current estimates reveal that over half of all franchises are owned by multi-unit franchisors.

These multi-unit franchise developers are generally assigned a specific geographic area in which to operate by the parent company. Their franchise agreement spells out how many units they are allowed, how soon they will be opened, and other details about running multiple franchise units. A multi-unit franchisor typically signs a development agreement at the same time as the initial franchise agreement.

However, if a multi-unit franchisor fails to meet the agreed-upon development schedule, the parent company may cancel the multi-unit development agreement and keep all fees that were paid up front as part of the agreement. Typically, the multi-unit franchisor will be allowed to operate any previously established franchise locations, as long as they remain in compliance with those individual franchise agreements.

Master Franchising

The master franchising relationship is similar to the multi-unit franchising relationship, except for one very important difference. The multi-unit franchisor is obligated to open more than one franchise from the parent company. A master franchise agreement also allows the franchisor to open and operate a number of locations in a defined area; but the master franchisor is also under contract to offer and sell franchise units to others looking to become franchise owners.  

The master franchisor will generally be required to own and operate at least one or two locations themselves, but may be allowed to sell those units to new franchisees at some point in time, if they choose to do so. A master franchisor pays a master franchise fee at the time of signing the initial agreement, and then collects a franchise fee from each franchise they recruit to join the system. They may also collect a percentage of royalties along with the parent company.

Area Representatives

Area representatives are commonly mistaken for master franchisors; and in fact, many may begin in that role before assuming responsibilities for an entire geographical area for the parent company. Area representatives do not enter into any agreement with the unit franchisors or franchisees. The unit franchisees sign a franchise agreement with the franchisor directly.

The area representative is a field support person, commissioned by the parent company to provide assistance to all the franchises in a specific area. Their responsibilities include providing opening and continuing support for individual franchisees as well as multi-unit and master franchisors.

Unusual Franchise Options

There are a few unusual franchise relationship structures that are not often seen, but still present business opportunities. The main ones are:

A conversion franchise is a relationship established with an existing independent company that is in the same industry and business as the franchise system. The independent business owner agrees to sign a franchise agreement and convert their business into a franchise.

Non-traditional franchise locations are those found in occasional mass gathering locations like airports, train stations, hospitals, college campuses, sports stadiums, ballparks, and mall food courts. Customer traffic is generated by some other activity in the venue, like a ballgame or concert. If the venue is closed, so is the franchise. These franchise units are smaller and generally offer only a limited selection of products or services.

Are you interested in learning more about the different options available for expanding your business through franchising? Or perhaps, you are looking for a franchise investment opportunity. Franchise Guardian advisors can help you find the best options for your situation. Call or contact us online to get started today.