Aside from the wide variety of businesses you can open with a franchise, there is also a classification system used to describe what kind of franchise an opportunity is. Any person thinking about getting involved in a franchise needs to understand the four types of franchises available.
A single-unit franchise is the most common type of franchise available. It is a franchise that the franchisee purchases directly from the franchiser or an appointed agent of the franchiser, and is for a single business unit in one physical location. The franchisee is sometimes assigned a territory by the franchiser, or the franchisee may already have a location in mind that will require approval from the franchiser. In many cases, the franchiser will protect a territory for a franchisee within a certain radius to avoid inter-company competition. To become a single-unit franchisee, it is recommended that you have a basic understanding of how business works, or that you have strong team in place to advise you. A franchisee is expected to be very hands-on with running his or her business unit.
A multi-unit franchise occurs when the same franchisee is granted multiple units by the same franchiser. These units can be within a specific geographic region negotiated between the two parties, or it can be multiple units with random geographic locations. In many cases, a franchiser will offer multiple units to a successful single-unit franchisee, and then offer discounts in licensing fees to start more locations. In some cases, franchisers may award multi-unit franchises to new franchisees who have displayed a competence for running multiple business units with other franchise opportunities.
An area development franchise agreement is typically offered to companies or individuals that have already set up successful franchises for other franchisers. A franchisee is given a geographic territory and must begin to develop units within that territory. Normally there is a established schedule between the franchiser and franchisee as to how many units must be set up within a predetermined time period. The geographic area can vary depending on the business and the agreement. It can be a region the size of a county, or it could be an entire state. If the franchisee does not live up to the unit development schedule, his or her license could be revoked and he or she may be subject to fines. Normally the franchiser offers special licensing pricing and ongoing royalty pricing to area development franchisees.
The master franchise agreement is rare, but it is something that many franchisees look to have. A master franchise owner is similar to an area development franchiser in that he or she is given a geographic region and cost breaks for the agreement, but the master franchisee can also sell franchises on behalf of the franchiser and collect part of the regular royalty for the franchise as well. The master franchise owner speaks as the appointed representative of the franchisee for their region, and the region is normally larger than one given to an area development franchisee.
There is one other kind of franchise agreement, which allows someone to start a franchise but not have to be the hands-on manager. In this case of the absentee franchisee, the agreement is made in advance that the franchisee will not be the day-to-day operator of the franchise, but that he or she will be responsible for reporting royalties and income to the franchiser. This allows people to have a franchise without leaving their regular employment.