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Types of Franchise Agreements

Before you consider what kind of franchise to investigate, it is extremely helpful to find the right entry level of franchising. Franchises are usually classified into four different categories or levels. Choosing the right level of franchising for personal and professional satisfaction is almost as important as choosing the right franchise.

Single-unit Franchises
A single-unit franchisee has the right to operate one franchise unit. Most franchisees enter the world of franchising by owning one unit. It is an excellent way to gain an understanding of the franchise system before considering additional units.

  • Territory: The single-unit franchisee may have a small radius of exclusive territory to operate within. If it is a retail store, it may be a two or three mile radius around the store. If it is a home-based business, it may be a few specific zip codes.
  • Level of participation: The single-unit franchisee is very involved with almost all operations. Because of this level of involvement, these franchisees are also known as owner-operators.

Multi-unit Franchises
The franchisee acquires more than one unit of the franchise usually at reduced initial franchise fees. A good sign of the health of a franchise organization is that many of the franchisees are multi-unit owners.

  • Territory: There is usually no exclusive territory where the franchises must be opened. The franchisee may have one unit in one part of town with a surrounding radius of exclusivity and another unit in another part of town 15 miles away or even in another county with its exclusive radius of operation.
  • Level of participation: The franchisee is less involved with each unit’s operations but is managing multiple operations and will need to have some level of supervision in each unit. The franchisee acts as a general manager. If many units are opened, a general manager and additional administrative and training staff may be needed.

Area Development Franchises
This license usually grants the franchisee the right to open a certain number of franchises in a given area. There is usually a production schedule where the area development franchisee must open a certain number of franchises during a certain period. As long as the area development franchisee stays on track in opening franchises in the area, he/she has an exclusive area where no other franchisees are allowed to open a franchise. Area development franchisees also typically pay reduced franchise and royalty fees.

  • Territory: The area development franchisee maintains an exclusive geographic territory as long as the opening schedule is maintained. The territories range from a small city to parts or all of a larger city.
  • Level of participation: The area development franchisee will be very involved in the opening of the first store to ensure its success. Another important function will be to look for qualified real estate to open the next few locations. Once several locations are open, the area development franchisee will need assistance to manage the units.

Master Franchises
Sometimes called a regional developer, a master franchisee has all the rights of an area developer and usually assumes a larger area. The main difference is that the master franchisee, in addition to opening franchises at reduced franchise and royalty fees, can also sell unit franchises, multi-unit franchises and area development franchises, and profit from those sales. The master franchisee usually receives a part of the ongoing royalties paid by each franchisee. There may be additional income available from distribution of products through the franchisees in the area and possibly some real estate interests in franchisee locations. The master franchisee will usually operate at least one unit for income generation, for use in franchise sales, and for use as a training facility. Master franchises are rare, and when they are available, they are usually sold quickly. Because of the multiple revenue streams associated with a master franchise, the potential return on investment is substantial.

  • Territory: Usually is a large metropolitan area, an entire state, or even several states or country. It is an exclusive area and will remain exclusive as long as the master franchisee meets the development schedule of franchises in the territory.
  • Level of participation: The master franchisee will usually open at least one unit and use a manager to manage it while selling other “sub-franchises” and helping them to operate properly. Very rarely is a master franchisee “hands on” in a unit franchise. They generally spend more of their time operating as a business consultant or coach to their franchisees to help them become successful.

Source: http://www.franstop.com

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