Franchising is a commercial enterprise business model that can help a company grow tremendously. As a franchisor, you will offer franchisees the authorization to set up new franchise stores that use your sales model, intangible assets, and profit from your mentoring, operational processes, and continued support.
Franchisees, meanwhile, will stump up your initial licensing fees, and continuous royalty payments, and will work to safeguard, open, as well as oversee new franchise stores, increasing your overall network revenue. Franchises are controlled and must adhere to state and federal government franchise laws.
If you franchise your business, you will be responsible for developing the official papers, pre-sale reporting, as well as standard operating procedures required to conform to franchise regulations as well as sell franchises. The franchise agreement is the legal document that establishes a franchise relationship, and the franchise disclosure document is the pre-sales disclosure document required when selling franchises.
In order to develop a sustainable franchise plan, you must first select the appropriate structure. It’s among the most crucial steps in franchising a business because it reflects the whole company.
Various Structures of a Franchise Business
It is critical to understand that the structure you select will have an impact on your expenses as you establish your company. Owing to that, make time for proper research as well as comprehensive financial modeling. Nevertheless, the following are the various franchise business structures you could use.
1. Master franchising
An arrangement where the master franchisee is awarded region-specific rights from the franchisor to also offer independent franchises, frequently within a contained territory, is a structure most prevalent in foreign market segments.
Note that the master franchisee receives a percentage of the franchise fee in exchange for giving continuous support to the independent franchisees, establishing an obligation cushion for the franchisor, whose commitments are more or less limited to the master franchisee. The lesser franchisor engagement is among the reasons this structure is regularly used in international markets.
2. Area Representative Franchising
At its very basis, this franchise structure is identical to master franchising, with the main distinction being its application only in domestic franchising. An area representative, same as a master franchisee, has the exclusive authority to sell independent franchises in a particular neighborhood.
Franchisee support is not exclusively the responsibility of area representatives. Rather, to gain greater organizational and logistical oversight, the franchisor signs the arrangement with independent franchisees, curtailing the area representative’s obligation.
3. Area Development Franchise Structure
Despite the title, the structure of an area development franchise is very separate from that of an area representative franchise. In this franchise structure, the area developer signs a single franchise agreement for the liberty to a predetermined amount of individual sites that should start within a specific period of time.
For example, an area developer might agree to a 10-unit service agreement for Dallas, Texas with the criteria that all 10 units be completed within five years. The specifics of such arrangements differ from brand to brand, but they usually include three clearly defined components: the number of units, the jurisdiction, and the timeframe.
4. Conversion Franchising
Conversion franchising is yet another widely accepted structure used by both new and seasoned franchisors. Established business operators are requested to reinvent their businesses as well as conform to the franchisor’s framework via conversion franchising, however, they are supported by the franchisor.
The advantage to the franchisor would be that the conversion franchisee enters the framework with an existing customer base and expertise that many startup developers lack.
Because they have prior expertise and assets, they generally require less preliminary assistance and mentoring, although this is not very often guaranteed. Conversion franchises vary from other types of franchises in that they would be typically sold with advantageous terms and lower fees.
5. Individual Franchising Structure
This individual franchising structure is without doubt another alternative to multiple-unit ownership. This franchise structure, as the title indicates, authorizes a single unit to a franchisee who really is (although not always) an owner-operator for an individual business site.
Although the franchisor might decide to grant a franchisee upwards of one location over time (establishing a multiple-unit profile), every unit is sold separately and is not a component of an area development regional arrangement.
Even though multiple-unit arrangements, area development agreements, as well as conversions are all appealing structures for franchisors, single-unit franchising is usually the best option for most new franchisors.
Have it in mind that individual or single franchise investors, as well as owner-operators, are almost always more convenient to target, and they will provide much more overview into what sort of assistance subsequent franchisees may require.
Single-unit franchising provides the most oversight over independent franchisees, making it easier to pinpoint which licensees are doing well enough to possibly unlock multiple outlets.