Single-Unit Franchises

A single-unit or direct-unit franchise exists when a franchisee invests in the right to operate one location or branded business. This is the oldest and simplest form of franchise relationship. It is possible for a franchisee to purchase additional single-unit franchises and when this occurs this is called a multiple, single-unit relationship. Owning and operating one franchised location is the classic structure used in franchising.

Multi-Unit or Area Developers

Multi-unit developers are granted the right and the obligation to open and operate a set number of locations, during a fixed period of time and generally in a defined geographic territory. The multi-unit developer will sign an additional agreement called a development agreement giving the developer the right and the obligation to complete a development schedule agreed to with the franchisor. Each franchise established by a multi-unit developer will have its own separate franchise agreement. In most multi-unit development agreements, the developer will pay the franchisor a fee for the rights granted in the development agreement and that fee is often applied on a pro-rata basis to each franchise fee that comes due.

Master Franchising

A master franchise relationship can look very similar to a multi-unit development structure, but has one significant difference. Under a master franchise agreement, the master franchisee has the right and the obligation to offer and sell franchises to other people looking to become franchisees of the system. The master franchisee 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. When a master franchisee signs the master franchise agreement, he generally pays a master franchise fee to the franchisor and then collect franchise fees from each franchisee recruited into its system.

The royalty a master franchisee collects and the unit franchise fees it charges are typically shared with the franchisor and that percentage may vary. The master franchisee may also enter into multi-unit development agreements. Of all the types of franchising relationships, the master franchise relationship is the most complex because the franchisor and master franchisee generally have some shared responsibilities in support of the unit franchisees. In addition, each master franchisee will be required to prepare its own franchise disclosure document, and if the master franchisee is in a state that requires registration or filing, meet those requirements as well.

Area Representatives

An area representative relationship looks very much like a master franchise relationship with one major distinction. The area representative does not enter into any agreement with the unit franchisees. The unit franchisees sign a franchise agreement with the franchisor directly. The area representative is in reality only a commissioned franchise salesperson and also the commissioned field support person for the franchisor in a geographic area. The area representative pays the franchisor a free to enter into the relationship and shares with the franchisor the franchise fee and royalties paid by the franchisees in its territory. The area representative provides the franchisees in its territory some opening and continuing support and like the master franchisee some of that support provided may be shared with the franchisor.

As with multi-unit and master franchise relationships, the area representative agrees to establish a specific minimum number of units, during a specified time period in a defined territory. The difference between a master franchise relationship and an area developer is that the master franchisee signs an agreement with his sub-franchisee while the area representative does not enter into a contractual relationship with the franchisees they support. The area representative also does not need to create or register his own franchise disclosure document. There are other franchise structures used in franchising.

1. A conversion franchise is a relationship established with an existing independent operator, in the same general business as the franchise system, who agrees to sign a franchise agreement and convert its business into a franchise.
2. Non-traditional locations are those generally found in mass gathering locations such as airports, train stations, hospitals, college campuses, sports stadiums, ballparks, food courts, portable kiosks in parks, etc. These are the types of locations where the customer traffic is generated by the other activities in the host facility. Few people go to a baseball game just to buy a hot dog, but there are a lot of hot dogs sold during a ball game. Also included in this category are other types of host locations such as convenience stores and big-box retailers. Another method of becoming a franchisee is buying an existing location from the franchisor or one of its franchisees that wants to exit the system. In addition to getting into business faster because you don’t have to find the location or work through constructing and equipping the business, there may be other advantages. You should discuss with the franchisor if there are any existing locations that are available for sale.