Part One of this article analyzed many of the Pros and Cons of multi-unit franchising. In Part Two, we look at whether your franchise company is ready for multi-unit franchising and if so, how do you qualify multi-unit prospects?
Are You Ready?
Having weighed the pros and cons of multi-unit franchising, your company must now decide the best multi-unit strategy to grow. Depending upon the franchise concept, target market and available resources, Franchisors have traditionally looked at the following tried and tested multi-unit growth strategies:
- Master Franchising – Used both domestically and internationally, this concept usually involves three parties: a franchisor/master franchisor, a master franchisee/subfranchisor and one or more single outlet franchisees. Master Franchise Agreements grant the master franchisee a prescribed territory and also establish a required development schedule. A master franchisee is usually responsible for single outlet franchise recruitment, site selection assistance, operational support and often training of new franchisees. Initial fees and royalty fees are generally split in an agreed upon formula that is set out in the Master Franchise Agreement. Generally, Master Franchising attracts a more sophisticated party with greater liquidity than the single unit operators and enables a franchisor to provide an infrastructure that it may not possess for the territory being developed. On the other hand, the wrong master franchisee can cause severe damage to a franchisor’s reputation if the master franchisee does not enforce the single unit franchise agreement or fails to carry out the Franchisor’s normal responsibilities. Master Franchising also poses a substantial financial risk to a franchisor if the Master Agreement is terminated.
- Area Development – An area development franchise has attributes of both the single unit franchise and the master franchise. Unlike the master franchise, the relationship does not involve three parties but typically just two, the franchisor and area developer. The area developer usually must own and operate a prescribed number of franchises in a specific territory. An area developer also must have the financial and human resources to open and operate the required units in the territory granted. Generally, area development agreements provide the advantage of accelerated growth with less investment or capital demands placed upon a franchisor.
- Area Representative – Typically, area representation involves: (i) three parties – the franchisor, the area representative and the unit franchisee; and (ii) two distinct agreements – an area representative agreement and the unit franchise agreement. Usually the area representative acts as a franchisor’s sales agent for individual franchise units and provides service and support to the franchisor’s franchisees. This arrangement is similar to Master Franchising, but unlike Master Franchising, the area representative does not contract with unit franchisees. Thus all fees are initially paid to the franchisor who in turn pays the negotiated split with an area representative. As with Master Franchising, both concepts now require specific FDD disclosures and virtually the same risks.
- Other Forms of Expansion – Less popular multi-unit formats include Joint Venture Arrangements. This concept is not as popular as other growth strategies because the franchisor has direct liability for the actions of the joint venture entity. Another less favorable growth strategy is that of conversion franchising, by which an independently owned unit operates under the franchisor’s brand. Franchisor’s must always be wary of the motivating factor precipitating the operator’s desire to convert. Refranchising is another less embraced strategy but may afford a franchisor strapped for capital with a way of expanding its business and avoiding much or most of the cost and distraction associated with day-to-day operations of multiple stores. Put simply, refranchising is when a franchisor sells company stores to franchisees. Selection of the right franchisee to buy the company operation is, as one can imagine, critical to the success of this type of multi-unit expansion.
- Conclusion – Before embarking on any multi-unit strategy, look at the cost associated with each growth strategy, the legal complexity involved with each concept, the target you are trying to reach and above all, make sure your infrastructure is in place to reach your goal. Our firm works with a number of successful multi-unit franchisors. When you’re ready, we’re ready to help you successfully work through the legal implications associated with each multi-unit growth strategy.