Which Types of Franchise Agreements are Right for My Concept?
The type of franchise agreement that’s right for your concept depends on how you want to grow and how similar concepts in your industry are growing.
For example, some concepts are better suited for multi-unit growth than others and should even consider it right from the start, such as food, beauty and fitness brands. Multi-unit franchisees dominate the restaurant sector of the franchise industry given the need for well-financed operators with prior food service experience.
Here are some franchise agreement models to consider for your emerging brand:
Single-unit agreements provide franchisors the most control over growth and franchisee recruitment. It’s usually the slowest and most prudent way to grow a franchise brand. It also allows franchisors time to focus on each franchisee and each location. If a franchisee turns out to be a bad fit for the brand, at least only one location will be troublesome as opposed to many owned by a multi-unit franchisee. If your franchisees turn out to be exceptional business owners, you can always offer to award them additional locations.
Growing with single-units allows franchisors to develop and refine their franchise systems at a relatively unharried pace. When your brand does hit a growth spurt, all systems will be ready to go. However brand awareness will likely be slower to develop and reaching royalty self-sufficiency may take longer.
Multi-unit agreements, where the franchisor sells multiple locations in a specific area to a single franchisee, are a proven way of expanding a franchise brand quickly. This is a logical next phase for emerging franchisors to expedite growth. The franchisor can tap their current owners and present the opportunity to more experienced entrepreneurs who might own franchises with other brands. Typically, entrepreneurs with multi-unit experience wait to see how well an emerging brand performs before deciding to invest.
Multi-unit agreements advance the franchisor toward royalty self-sufficiency in bigger strides and allow the franchisor to deal with fewer franchisees owning a greater number of locations. But, this model also comes with greater risks. If a franchisee goes rogue or is stubborn about doing things the brand’s way, he or she could damage the brand quicker than if he or she owned only one location. Also, if their first couple locations are not financially strong, the remaining signed but not opened locations may never open.
Since there’s more at stake with multi-unit growth, franchisors should look for potential multi-unit franchisees who have experience in their field along with experience being a multi-unit owner. Multi-unit franchisee candidates must be able to multi-task, manage a team effectively, maintain strong financial management habits and have a strong work ethic. They should also be able to fund whatever amount of stores or units they agreed to open up front.
Regional or Area Development
Here the franchisor sells the right to multiple units to be developed by a franchisee in a given area over an agreed upon timeframe. The franchisee signs both a development agreement and individual franchise agreements for each unit as they are developed.
If done with the right franchisee – experienced and well-capitalized – the regional or area development model is useful for achieving faster system growth in multiple markets. However, with this model, franchisors give up a significant amount of control over growth in a territory. And, if the franchisee can’t deliver, your brand can potentially lose its presence in his or her markets and may be tied up for a number of years until they default on their development agreement.
Regional Director or Area Representative
A franchisee purchases the rights to develop the brand in a region and assumes a role similar to the franchisor. He or she awards single and multiple units in their region, and provides limited support in exchange for a percentage of initial fees and potentially a portion of the royalties. The regional franchisee may also be required to own one or more units. The area representative model is similar but on a smaller scale.
While the franchisor’s involvement is significantly reduced, they maintain a contractual relationship with the regional director or area representative for their obligations and commitments on developing the territory. The franchisor also maintains a direct contractual relationship with each franchise sold through a standard franchise agreement.
Winmark Franchise Partners, with 30 years of franchise experience and more than 800 franchise owners representing more than 1,200 locations for five brands, can help you decide which kind of franchise agreement is right for your brand. For more information, contact us here or at (844) 452-4600.