5.05 – Reviewing Franchise Relationships
Franchising offers a vast array of opportunities, from the smallest single-unit operators to large multi-million-pound investor groups. This lesson will explore the various types of franchise relationships and the benefits and challenges associated with each.
Single-Unit Franchises
A single-unit or direct-unit franchise allows the franchisee to own and operate one franchised business. This traditional method has been the cornerstone of franchising for decades. Single-unit franchisees, often involving family members, manage and supervise the business daily, making it their primary source of income.
These franchisees usually have a strong connection to their local community, as they live and interact with their customers in the same neighbourhoods. This local involvement often leads to better adherence to brand standards and a deeper commitment to their business.
Growing One Franchise at a Time
Successful single-unit franchisees often look to expand by acquiring additional franchises. This method leverages their existing knowledge, relationships, and resources, reducing the risk associated with new investments. However, this type of growth doesn’t typically offer reductions in fees and requires careful attention to franchise agreements, which may vary over time.
As franchisees expand, they benefit from economies of scale, such as sharing staff and resources across locations. This approach can lower costs and improve efficiency, but it’s crucial to navigate updated franchise agreements and cross-default clauses with the help of a qualified franchise attorney.
Multi-Unit Developers
Some franchisees opt to become multi-unit developers from the start, securing the rights and obligations to open multiple locations within a specified timeframe and area. This approach helps avoid market competition and often includes market exclusivity, ensuring that the franchisee is the only operator in the area.
Multi-unit development agreements typically include specific timelines for opening each location. Missing these dates can lead to terminations and loss of development rights. Developers may benefit from reduced initial franchise fees for additional locations, but the specifics vary between franchisors.
Advantages of multi-unit development include the ability to shift personnel between locations, centralise product preparation and inventory storage, and reduce management costs through consolidated support staff.
Master Franchising
Master franchising involves becoming a franchisor in a designated area, authorised to offer sub-franchises. Master franchisees typically open and operate their locations before selling franchise rights to others. They share initial and continuing fees with the original franchisor, with the percentage split varying widely.
Master franchise relationships are complex and less common among U.S.-based franchisors today, though they still have some international use. They require careful management and understanding of the unique dynamics between franchisor, master franchisee, and sub-franchisees.
Area Representatives
Area representatives acquire a territory to solicit and support franchisees but don’t become franchisors themselves. They act as commissioned sales and support personnel for the franchisor, paying a market development fee for their role. However, this model is declining due to its potential to depress the franchise system’s value and focus on expansion over support.
Adjusting the area representative’s role and fee structure to performance-based criteria can mitigate some downsides, but alternative growth strategies are often more appealing.
Understanding Franchise Relationships
The franchise relationship is contractual, not a partnership. Franchisors do not have a fiduciary duty to franchisees and can make decisions benefiting themselves and other franchisees. Great systems involve open communication and advisory councils, but ultimate decision-making rests with the franchisor.
Franchisees are often seen as formula entrepreneurs, following a proven system rather than true entrepreneurs. This structure can be frustrating for those who prefer making independent decisions, leading to potential conflicts.
Success in franchising requires understanding the system’s constraints and the franchisee’s role in making the business successful. Emerging franchisors must carefully design their systems to support growth effectively. While franchising can be profitable and enjoyable, it comes with risks and challenges that must be approached with open eyes and thorough preparation.
