What are the different Franchise formats?
Whether you are considering franchising to expand your business or you’re looking to buy an established franchise to operate in your country, it is important to know the different formats of franchises on offer.
While there are many different iterations and formats for franchise agreements, here we will look at the 3 most prevalent formats and explore their features further;
1. Individual Franchise:
Sometimes referred to as single-unit franchise. As the name implies, an individual franchise grants a franchisee the right to operate one franchise unit.
Individual franchise ownership is typically the entry method for investors to enter and become more acquainted with the world of franchising.
High level of participation: The franchisee is involved with all element of operations, which grants him a clear understanding of the franchise system in place.
Exclusivity: Typically, single-unit franchisees will either not be granted any geographical exclusivity, or in some cases a small territory is granted for the franchisee to operate exclusively in.
2. Area Development Franchise:
This type of franchise agreement grants the franchisee the right to open and operate multiple units in a certain location. In Area Development Agreements, a development schedule is typically incorporated to ensure the franchisee opens a preset number of units within a predetermined timeline.
An area developer can in certain cases be offered a reduced franchise fee for each unit he develops.
High level of participation: The Area Developer is expected to be very involved specifically in the opening stages of each store, in order to ensure concept implementation and adaptability. Assistance may be hired later on to contribute to operating the locations.
Exclusivity: As long as the area developer franchisee adheres to the development schedule, they will maintain exclusivity in the area they operate in. This can be a city, province or even a whole country in some cases.
3. Master Franchise:
Under a master franchise, the franchisee is granted all the rights of an area developer. On top of that, a master franchisee reserves the right to sub-franchise units to single-unit operators or even to area developers.
The master franchisee will be entitled to a percentage of the royalties paid by the sub-franchisees. Additionally, a master franchisee will typically also be extended reduced franchise fees.
Lower level of participation: A master franchisee will be expected to oversee the implementation of the first franchise unit. Consequently, the master franchisee may take a more supervisory role after sub-franchising.
Exclusivity: As long as the master franchisee adheres to the pre-defined development schedule, they will maintain exclusivity in the area they operate in. This is usually a large province, state, country or an entire region.
For the franchisee, it is essential to determine the type of franchise they wish to purchase and operate. This decision will mainly be based on financial capabilities and goals, their desired exclusivity and participation levels.
For the franchisor, it is also equally-important to select the franchise format they wish to implement. They may opt to utilize different formats in different geographical areas. They will typically follow a predetermined expansion strategy and franchise format mix.