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Franchise Tutorial 18: Intro to Franchise Growth Format

Within franchising, there are a variety of different growth formats used by franchisors. These formats provide different opportunities for a prospective franchisee. Beyond the single-unit franchise agreement (in which a franchisee has a single location), there may be the following potential growth opportunities within a franchise brand. Check with the franchisor to determine if these opportunities exist with the particular brand you are looking at.

A multi-unit franchisee will have multiple single-unit franchise agreements. These may or may not be in the same geographical area. The multi-unit franchises may be tied to an area development agreement or master franchisee agreement.
An area development agreement is an agreement to open a specific number of locations within a specific geographical area within a specific period of time. The area developer is provided exclusivity for an assigned geographical area, provided that you meet the development schedule or time-lines. Note that, as each location opens, the area developer enters into a single-unit franchise agreement for each specific location.
A Master Franchisee Agreement provides the master franchisee with the ability to sub-franchise and grant franchises to other franchisees within an assigned territory (as opposed to area developers who are opening all the locations themselves). The master franchisee will typically be responsible to open at least one location themselves and provide some level of support to the franchisees within his assigned territory. For this support, the master franchisee will receive a portion of the royalties as compensation.

Although these definitions are generally consistent amongst franchisors, there are sometimes variations. For example, some franchisors refer to the "area developer" as a "master franchisee". Be sure to get clarity from the franchisor as to what their definition is so that you are both speaking the same language.

Multi-unit, area development or master franchisee agreements are all similar in that they provide the licensee with the ability to generate revenues from multiple locations. Rather than investing in one location, you invest in multiple locations so as to diversify and improve your odds of success. If one location is underperforming, it can be offset by the success of other locations. You can also have on-going economies of scale where you share administrative costs between the locations. You can share training expenses, employees and management. The franchisee has greater earning potential without having to go through more training or a learning curve because you are familiar with the brand and the operating system and are simply duplicating what you know.

Multi-unit, area development and master franchisees will usually come at a higher initial financial investment, which is offset by the potential for greater returns. You will want to ensure that you have the financial resources to open the multiple locations. Often lenders will want to see some proven performance from the first few locations before lending additional funds for continued growth, especially in today's current economy. If you fail to meet the schedule outlined in the area development or master franchisee agreement, the franchisor may terminate the license. You would lose any up-front fees that you had paid. You would be permitted to continue to operate the stores that you had opened but could possibly lose exclusivity for the development area.

There is the challenge that, as the brand evolves, you may be required to upgrade or remodel. This may include changes to the branding elements, equipment, technology and/or remodelling of the physical premises of your locations. With multiple locations, this can be expensive.

For a master franchisee, these costs will be shared with the other franchisees that you are supporting. However, you may have the challenge of operating your own locations while, at the same time, working to find sub-franchisees. You will need to hire support staff and have the infrastructure to provide the support. You will need to grow quickly in order to have the revenues to cover the costs of this infrastructure.

A person who has strong leadership and management skills would do well as a franchisee in any of these multi-unit situations. They must be able to delegate the management tasks, as they cannot be at every location at the same time. The franchisee must have the ability to work on the business rather than in the business by overseeing multiple locations at the same time.

As with any franchise opportunity, do your due diligence and fully understand your rights and obligations. With multi-unit opportunities, you will need to review the area development agreement or master franchisee agreement, as well as any single-unit franchise agreements. You will need to review the single-unit agreements, as each one will be entered into as you open the location. Talk to other franchisees who are operating under multi-unit agreements to fully understand the opportunity from someone who has been there and done it.

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Posted Date: January 2011