Multiple Unit Franchising

Just when you thought you'd seen or read it all about the variations in franchising, here's another twist: multiple unit franchising.  You may have been exposed to it when you heard "Area Developer" or "Master Agreement".

When a company chooses franchising as their method of expanding distribution, they have not yet finished their decision making process.  They now have to decide how they intend to provide support to franchisees in remote geographies.  They typically have four choices: Sub-franchising, Area Representation, Area Development or Brokerage.

In Sub-franchising agreements, the franchisor grants the sub-franchisor the right to offer and sell franchises, and enter into agreements directly with franchisees.  The franchisor delegates all rights and responsibilities to the sub-franchisor, including sublicensing its trademark in the sub-franchisor's territory.

Sub-franchising is not as popular today, except for expansion in international markets where territory expansion is important.  However, the franchisor losses regional equity and losses direct contact with the franchisees.

In Area Representation agreements, the area representative (who may or may not be a franchisee) is given the right to solicit to prospective franchisees and to provide limited services (e.g., marketing direction, supervision, quality inspection, etc.) within a specific territory.  However, all franchise agreements are entered into directly between the franchisor and the franchisee.  Subway is a franchise that uses area representatives.

The term "Master" franchisee typically refers to either a sub-franchising or area representation situation.

Area Development agreements are normally with a multiple unit franchisee for expanding the franchise in a specific territory.  Papa Johns is a franchise that uses area developers.  However, the area developer normally cannot sub-franchise or solicit to totally independent franchisees.  Expansion through area developers typically results in fewer but larger franchisees; which can be a double-edged sword for the franchisor.  In addition, expansion can be limited due to the limited number of well-funded area developers.

Finally there are brokers.  Franchise brokers are not normally franchisees.  They usually only market for and pre-qualify prospective franchisees on behalf of the franchisor.  Brokers are usually compensated exclusively by referral fees, will not have a long term agreement and will not pay a fee to the franchisor.  Franchise North American, LLC is an example of a franchise broker.

Knowing these relationships and agreements will help you understand the players involved in any particular franchise.  You may even be interested in one particular system over another based on your financial resources and aspirations.