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Franchise Formats

Written by: John Power

Article Overview: There are several different franchise formats to consider when selling franchises. You might refer to these different formats as "flavors" of franchising. It is important to understand the differences so that you can properly develop your franchise program.

Franchise Formats

Single Unit Franchisee

A single-unit franchise is normally offered with an initial franchise fee of $15,000 to $35,000, and with an ongoing royalty of 2% to 6% of gross revenues. Historically this is the most common form of franchising. About half the franchisees in the United States operate single-unit franchises.

Area Developer

In this case, the Franchisor sells the rights to a certain number of franchises, in a given geographic territory, to an Area Developer, or Multi-Unit Franchisee.

The Area Developer pays a larger initial fee to the Franchisor, something in the range of $50,000 to $200,000, and agrees to open units on a contracted schedule to maintain the protected territory. Area Developers are more sophisticated and have more financial capability than Single Unit Franchisees, but they may be more difficult to locate, and the sales process may be more protracted and more complicated.

If the franchise fee is $30,000 and the Area Developer commits to open 10 units, they may pay one-half as a down payment ($150,000) and the balance ($15,000 per unit) as each new unit is opened. Royalties would still be 2% to 6% of gross revenues.

A simple derivation of this type of franchising is allowing existing franchisees to purchase the rights to other territories. This can be a successful expansion model because current franchisees purchasing additional territories have already proven themselves in the franchise system.

Some franchisors specifically seek multi-unit operators, and this is common in the restaurant industry. One example is Famous Dave’s Bar-B-Que, which is seeking “Experienced multi-unit restaurateurs with a desire to be Famous and develop a minimum of 5 units.”

Master Franchisee (Sub-Franchisee)

This person contracts to handle all of the franchise development within a certain geography, receives all the fees, and takes care of some or even all of the relationship matters with the end-Franchisees. In essence the original Franchisor “sells” a territory and, to a degree, steps back. The Master Franchisee becomes the franchisor in his territory, does what the franchisor does, and in essence, becomes your “alter ego.”

This is a popular International franchising model. It is used to expand to other countries, but it not used as much for franchising within the United States, because there is a loss of communication and control between the original Franchisor and the end-Franchisee. When expanding to other countries, the Master Franchisee can understand the local and cultural issues better than the original Franchisor and this can boost expansion.

The Master Franchisee perhaps pays an initial fee of $50,000 to $150,000 and then he/she and the original Franchisor split fees from that point forward. The fee split depends on the number of services each provided by the original Franchisor and by the Master Franchisee to the end-Franchisees. Internationally, the franchise usually receives about 20% of the fees received by the master franchisee, since he has to have money to develop the business in his country

The fees may be paid by the end-Franchisee to the Master Franchisee, and then to the original Franchisor, or they may be remitted directly by the end-Franchisee to the original Franchisor, with a percentage returned to the Master Franchisee.

The Master Franchisee may be required to open a certain number of company units. We recommend that the Franchisor require that the Master Franchisee open and operate one or more units as company operations, before starting to sell franchises in his area. How can they sell and support a concept without knowing how to operate it?

The Master Franchisee will need to have its own UFOC and Franchise Agreement, and will need to apply to registration states if selling in the United States, because they will also be selling franchises. Thus, two sets of legal documents are required. These normally must be approved by the Franchisor.

Area Representative

This is sort of a combination of the above two models, and is mostly used in the United States, when it is used. They usually own at least one franchised unit and they go out and sell others in a given area. The Area Representative may provide training and ongoing support. Fees are split about 50/50.

Subway and Mail Boxes Etc. successfully used this model for their expansion, including their expansion in the United States, and it has allowed them to grow very quickly. However this model has resulted in serious problems or even failure for others because the system ended up with poor quality franchisees, and/or because the franchisor lost too much control and was not able to maintain system operations and consistent quality.

Some considerations:

These alternative models can provide faster growth than single-unit franchising, but must be carefully considered before being used.

You want to be certain that you don’t lose the marketing and operational strength that comes from your commitment and passion about the program, by inserting others into the sales and support process.

When you bring other parties into the franchise sales and support process, you will give up some fees and control, but will not give up much legal liability.

You should not give up the ultimate control and approval of the sale, except in true master franchise situations in other countries. Those reselling the franchises should bring franchise candidates to you, but you should approve them and “sign the deal.”

You can mix the above franchising models, selling individual franchises in some areas and selling multi-unit franchises in another area.

The franchise format that you implement will have a significant effect on your overall success, and you should consider these matters very carefully.

More information can be found at:  www.biltmorefranchise.com

 

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Article Tags: derivation, financial capability, franchise development, franchise system, franchisees, franchisor, franchisors, geographic territory, geography, gross revenues, initial fee, initial franchise fee, master franchisee, restaurateurs, royalties, royalty, rsquo, single unit, unit franchises, unit operators



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