Five methods of franchising

Though further variations are possible; most franchise systems draw from five common methods of franchising.

Single-unit franchising

The method of franchising most people are familiar with would involve A franchisee buys a franchise business from the franchisor the franchisee would then operate the business in a particular location or area. This is called single-unit franchising. The result is often a franchisor with a number of franchisees owning and operating individual stores in different locations.

Sequential franchising

Sequential franchising is an alternative type of franchising arrangement. Using sequential franchising, additional franchises are granted on a one-at-a-time basis. In other words, after establishing the second franchise, a franchisee must prove he was capable of operating both stores, before being allowed a third franchise. The implication of this type of arrangement is that it becomes increasingly difficult for one individual to maintain direct involvement in each of his businesses. Therefore he would need to hire and manage employees to run the different stores.

Area development

A variation on sequential franchising is area development. This method of franchising would award an "area developer." The area developer, from the outset would be given the rights to multiple franchises. The developer would then be expecting to establish and manage these stores himself, with the assistance of hired employees. The "Area developer" may also be required to establish a certain number of stores within an agreed time frame.

Sub franchising

The fourth method of franchising is termed sub franchising. Often called master franchising, sub franchising involves two levels of franchises: sub franchisors (often called master franchisees) and sub franchisees. Sub franchisors are like a franchisor in that they will often be responsible for recruiting and providing ongoing support to operating franchisees. However, in contrast to the franchisor with nationwide interests, they are responsible for a smaller area.

Area representation

Less common than sub franchising is area representation. Like sub franchising area representation has two levels of franchisees. The main difference is that the master franchisees (called area representatives in this instance) are delegated less responsibility than sub franchisors by the franchisor. Specifically, the franchisor will often play an important role in recruiting and providing ongoing support to franchisees, within an area representative's region.

Comment

There is considerable variation in the methods of franchise agreements available to franchisors and prospective franchisees. For both parties, this means considering what method is most appropriate for their individual circumstances.

Each method carries a set of advantages and disadvantages relative to the other types of franchising your mission is to research and determine which type of franchising is most suited to a particular type of business.

People interested in buying a franchise factors such as level of available investment capital, managerial ability and ambition are likely to play an important role in determining what type of franchising opportunity would be most suitable.