The Different Types of Franchising

When deciding on purchasing a franchise, an important area affecting many potential franchisees is deciding on which type of franchising is appropriate to their circumstances. This can be a complex process and there are several different levels of franchising to choose from. Therefore, to understand this a little better, we will discuss these different levels of franchising and which one best suits your individual needs.

Single-Unit Franchising

As a franchisee, you have the right to operate one franchise unit. In fact, most franchisees enter the world of franchising with a single-unit franchise. The benefits of first owning a single-unit franchise is that it is a fantastic way to understand the system before taking on more units. You may be given an exclusive territory in which to operate your franchise in. Your level of participation is rather high as you will be involved with almost all operations of your single-unit franchise.

Multi-Unit Franchising

Multi-unit franchising requires the franchisee to acquire more than one unit of the franchise. The franchise fees are usually reduced when obtaining more than one franchise. The risk is also lower as the franchisee can spread the costs across multi-units and the locations may be more successful. Your participation will be less involved with each of the units operations. However, you will require some level of supervision in each unit to make sure things run smoothly. When deciding on multi-unit franchising, first look at whether many of the other franchisees are multi-unit owners. If they are, it is a good sign of the health of the franchise.

Sequential Franchising

The franchisor may allow you to purchase a second and perhaps even a third franchise. With sequential franchising, it is exactly as it sounds. These additional franchises are approved on a one-at-a-time basis. Therefore, after establishing the second franchise, you would need to prove that you are capable of operating the current stores and therefore be able to operate an additional one. It becomes increasingly difficult for you to be directly involved in your franchises and so you will be required to employ managers to run the different stores.

Area Development

Area development grants franchisees the right to open a certain number of franchises in a given area. Usually, there is a production schedule to which you need to adhere to. This schedule demands that you open a certain number of franchisees during a certain period. You will be given an exclusive area where no other franchisees will be allowed to open a franchise. Your level of participation will be high as you will be very involved in the beginning stages of the first location to make sure it is successful. Qualified real estate needs to be searched for in order to open the next few locations.

Subfranchising or Master Franchising

Subfranchising involves the subfranchisors (also known as master franchisees) and the subfranchisees. The subfranchisors are similar to franchisors in that they will be responsible for recruiting and providing ongoing support to the operating franchisees. However, they are responsible for a small area. In addition to opening franchises at a much reduced franchise fee and royalty, you can also sell unit franchises, multi-unit franchises and area development franchises and make a good return on the sale. The master franchisee usually receives a part of the royalty and franchise fee paid by each franchisee.

Area Representation

Like subfranchising, area representation has two levels of franchisees. The main difference is that the master franchisees (called area representatives in this instance) are delegated less responsibility than subfranchisors by the franchisor. The franchisor will often play an important role in recruiting and providing ongoing support to franchisees, within an area representative’s region.

As demonstrated, there is a great variety in the methods of franchise agreements available. When deciding, you will need to consider which method is appropriate for your individual circumstances. Each method has its own advantages and disadvantages. The following characteristics play an important role in determining what type of franchising opportunity would be most suitable:

• Available investment
• Ambition
• Managerial ability
• The level of participation

It is important to consider each of these characteristics before deciding on the type of franchising to go into. Take time for careful consideration and ascertain your capabilities appropriately. Go forth and conquer!

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