TYPES OF FRANCHISE SYSTEMS
individual and area franchises
When you think of franchises, you may, like most people, think of a McDonald’s, Wendy’s, or Arby’s. True, a franchise relationship can be structured simply as a single business outlet, historically the most common form of franchise. However, the individual franchisee may acquire rights to establish additional franchised businesses in the form of options or rights of first refusal. When the franchisee establishes other franchises, he or she moves into the second form of a franchise relationship - - an area franchise. This franchise relationship usually takes one of three formats: the multiple outlet franchise, subfranchising, and three party relationships.
Multiple Outlet franchise
The multiple outlet franchise may evolve from an individual franchise, as discussed above, or may be developed at the beginning of the relationship. In the latter case, the franchisor and franchisee typically enter into an area development agreement that grants the franchisee the right to open franchised businesses in an identified area and prescribes the development responsibilities of the franchisee and a development schedule. Each business outlet is usually governed by a separate franchise agreement. The franchisee must generally own a controlling interest in each franchise, but is frequently permitted to have minority investors (e.g., equity owning managers) in individual franchised outlets.
A second type of area franchise permits the area franchisee to grant subfranchises. The pure subfranchising system involves two distinct contractual relationships: one between the franchisor and the subfranchisor and a second between the subfranchisor and the subfranchisee. There is generally no direct contractual relationship between the franchisor and subfranchisee and/or location of the business. Typically, the subfranchisor will own and operate some franchised outlets. The right to grant subfranchises reduces the capital requirements of the subfranchisor, who can look to subfranchisees for much of the capital required to develop the territory.
three party relationships
The third form of area franchising is a hybrid of the first two forms. This form is a three party relationship and involves a development agreement between the franchisor and the area franchisee, which delegates to the latter the obligation to secure, train, assist and/or supervise franchisees. However, the franchisor grants the franchise directly to and has a direct contractual relationship with the franchisee (the area franchisee may or may not be a party to the agreement). Fees paid by franchisees are shared by the franchisor and the area franchisee. As in the subfranchise relationship, the area franchisee may also own and operate one or more franchised outlets.
Thus, as a prospective franchisor, you have more than one option when you think of developing your franchise.
To choose your franchising option wisely is to choose well!
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