Growing a franchise requires a sound franchise structure. A franchise structure is the business model a Franchisor develops to offer to potential Franchisees. To properly select the appropriate franchise structure, a Franchisor must first carefully define their franchise model, revenue structure, and the support and training required to ensure the success of the franchise brand.
In the franchise industry there are six commonly used structures that Franchisors offer to potential Franchisees. Understanding each structure will enable you to determine which structure will best meet your goals as a business owner.
The Six Franchise Structures are as follows:
- Single-Unit: This structure is highly recommended for new Franchisees with limited business experience. It also offers Franchisors the greatest opportunity to support a franchise as there are fewer moving parts. The performance and developmental needs of each franchisee are easily identifiable within this structure.
- Multi-Unit: The Multi-Unit structure grants a single Franchisee the opportunity to operate multiple units in a specified territory. This is an opportunity to scale a business without having to commit to developing a large territory, and thus limits the contractual obligations of a Franchisee. Multi-unit agreements also often come with discounted franchise fees.
- Area Development: Unlike the Multi-Unit structure, this option grants the Franchisee exclusive territory rights to open and operate a predetermined number of single unit franchises based on a required schedule. This structure is very popular in the franchise industry because it affords the opportunity to delegate a large portion of the operations to the Franchisee. The Franchisee acts as a general manager for multiple units. This structure reduces the costs paid to the Franchisor in franchise fees and royalties and allows the Franchisee to keep more of the profits.
- Conversion Franchising: Prospective Conversion Franchising candidates are unique in the sense that they operate a similar business affording a Franchisor the benefit of an established cliental, minimal training and support. This structure grants the Franchisee the right to operate a single-unit franchise at a reduced franchise rate with the various benefits of working within a franchise system. Those benefits include but are not limited to reduced costs for products and services, greater bargaining power, robust marketing plans, unlimited business support, ease of navigating government regulations, ease of scaling, and higher resale values.
- Sub-Franchising: The Sub-Franchising structure, often called a Master Licensor, grants the Franchisee a large territory in which they have contractual permission to sell individual franchises in their territory to other franchisees. The Sub-Franchisee would be required to provide support within the specified territory for a shared fee agreement with the Franchisor. A typical agreement is a 50/50 split of franchise fees and ongoing royalties. The contractual agreement would be exclusively between the Sub-Franchisee and his/her Franchisees. This provides the Sub-Franchisee the opportunity to participate in the role of a franchisor without having had to create the franchise from scratch.
- Area Representative: An Area Representative structure is similar to the Sub-Franchising structure. But the contractual agreement is between the Franchisor and the individual Franchisee. This allows the franchisor to have a greater level of control within the franchise brand. An Area Representative is also entitled to a portion of the franchise fees and royalties, and picks up a larger territory for a reduced amount.
Keep in mind that there is no right or wrong franchise structure. However the structure you select should fit the kind of business you want long term vs. the kind of business you want short term.
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Source: Siebert, Mark. “How to Choose the Best Structure for Your Franchise Company.” Entrepreneur, Web. 6 Jan. 2016.