Single-Unit Franchise Arrangement
A single-unit franchise means you own one franchise unit and are operating the business under the terms of the franchise agreement.
The cost of a single-unit franchise varies. It ranges from thousands of dollars to millions, depending on the company’s size and the brand’s strength.
You are responsible for the start-up and ongoing costs of operating the franchise. Most people get a loan to start, but the continual expenses of running the franchise come from the revenue generated by the business.
Managing a single-unit franchise is flexible and depends on your preferences in how involved you want to be.
Some franchisees prefer the hands-on approach of being at the franchise every day. Others prefer to check in occasionally while they spend most of their time doing other things. Some investors buy the franchise for passive income and don’t get involved beyond financing it.
Single-unit franchisee obligations include:
Paying ongoing franchise fees (advertising, royalties, etc.)
Adhering to the franchise agreement
Maintaining brand integrity
Communicating with the franchisor
Hiring, paying, and training employees (if required)
Quality control and customer service
If you can meet these obligations, a single-until franchise agreement could be for you.
Multi-Unit Franchise Arrangement
The responsibilities of a multi-franchise arrangement are the same as those of a single unit. You just own multiple franchises instead of one.
Since you can’t be everywhere at once, you’ll need to rely on your managers and employees to oversee much of the day-to-day operations of each unit.
Many multi-unit owners’ goals are to slowly grow their franchise ownership portfolio. Experienced entrepreneurs, for example, are well-suited for this arrangement. They can allow their units to be managed by their staff while they divide their time between expanding a current franchise and exploring other business opportunities.
Area Development Agreement
An area development franchise arrangement is more complex than single- or multi-unit franchise ownership.
The franchisee (aka the multi-unit developer) owns multiple franchises, but rather than having the units in different territories, all of them are designated to a specified area. The intent is to expand the franchise brand to territories it isn’t currently in.
In addition to the franchise agreement, you will sign a multi-unit development agreement with the franchisor.
A multi-unit agreement requires you to open a set number of new franchises within a given market within a specified time.
The terms of these agreements vary. But for example, you agree to open five locations in five years. You pay the initial franchise fee upfront, with deposits and fees added for each additional unit you decide to open per the terms of the agreement.
This requires a huge start-up cost, which is one of the reasons why area franchise agreements aren’t for everybody. The costs can be prohibitive and rule out many candidates immediately.
Advantages of Area Development Agreement
If you are an entrepreneur with enough capital, experience, and have time to take on an area agreement, there are some significant advantages.
The most significant one is that you lock down a region or market, and you are the exclusive franchisee for that territory, which is a pro because that means avoiding competition from other franchisees.
Additionally, many franchisors pay their franchisees an area development fee.
The reward varies and is based on the task of finding and selecting locations, which falls on the franchisee without the franchisor’s help or with very little oversight. So the more work you do on this front for them, the higher your financial payout is in return for scouting territories or markets.
Development-related tasks could range from choosing the property, working with construction companies, figuring out the logistics, gathering permits, leveraging your project management and communication skills working with others, and so much more.
That’s why franchisors want to pay you to do all the heavy lifting for them when it comes to developing a territory for its franchises.
Area Developer at Computer, Businesses on Desk Showing Territorial Franchise Rights Lead to Higher Investment Returns
Multi-unit developers often pay a lower start-up cost per franchise than someone buying a single unit. Once the area developer has fulfilled their contractual agreement, the franchisor allows additional units to be established at a lower price.
This goes for the royalty fees as well. You can negotiate lower royalty fees for yourself with the franchisor. This makes sense to the franchisor because the cost of supporting a multi-unit franchise is lower per unit than a single unit.
Multi-unit agreements benefit the franchisor by letting them secure key markets, which allows them to plan marketing support strategies, negotiate with suppliers, and secure that region without looking for new franchisees.
Franchisors don’t enter into area agreements with anybody who says they want to do it. There is an inherent risk for them. Once the agreement is made, the territory becomes unavailable for further consideration. The franchisor makes every effort to ensure they choose a candidate who will follow through.
If you choose this route, you should be ready to commit to meeting the timelines described in the contract and run each of the franchise units accordingly. Not following through on these obligations could cost you your investment and even put you at risk for legal action from the franchisor.
Master Franchise Arrangement
A master franchise arrangement is for the serious entrepreneur/investor. You enter the franchise world on an entirely different level than with the other agreements we’ve mentioned.
As with an area agreement franchise, you must sign an additional agreement: the master franchise agreement. You’re granted the right to act as the franchisor with the ability to open new franchise units.
The master franchise arrangement is truly an executive business model. With this agreement, you share the profits and benefits on a larger scale.
Area development and master franchise agreements are similar to multi-unit franchising minus the perks, responsibilities, etc. The most significant difference is that just because you own multiple units, doesn’t mean you have the authority to operate within a designated region or market.
That comes with area development granted by the franchisor’s permission.
An area development agreement, on the other hand, doesn’t grant you the right to sell, lease, or transfer a franchise. That comes with the master agreement.
Master Franchise Surrounded by Smaller Units; Master Franchise Arrangement Lets You Establish Franchises Like a Franchisor
Master franchising is busy work. You’ll be responsible for recruiting franchisees, training them, and supporting your existing franchises. In addition, you may be required to sell a set number of franchise units as part of your agreement. Marketing and all of the costs entailed also fall on you, as well as the costs associated with developing the franchise.
One example of a master franchise arrangement might be the intent to launch the brand in another country. In this situation, the franchisor relies on you to handle all the logistics and costs of establishing and building the brand internationally.
Studies show that about 20% of US-based franchises use master franchising expansion tactics when they want to grow their presence in other countries.
This approach is cost-effective for the franchisor because you, as a master franchisee, handle everything associated with construction, property acquisition, opening new units, coordinating supply logistics, dealing with trade partners, etc.
The master arrangement requires the most significant commitment of time and money. It also requires you to have enough experience with multiple facets of business that allow you to negotiate with a multitude of people (sometimes from different cultural backgrounds).
Being able to “get things done” is crucial.
The reward is a percentage of initial franchise fees and royalties. You could also share equities for any real estate investments the franchisor has.
Source: allusafranchises
