Franchises are a common way of starting a new business or expanding an existing one, but not all franchises are the same. There are many different types of franchise agreements that exist, each with its own pros and cons. Here is an overview of some of the most common ones.
Basic Definition of a Franchise
At its core, a franchise is a relationship between two entities: a franchiser and a franchisee. The franchiser owns a large, well-known brand and has developed a business model that it allows a franchisee to use in return for payment. The most common examples are national restaurant chains such as Boston Pizza or Tim Horton’s. An actual franchise contract is a very long and complex document that contains many clauses concerning the use of intellectual property, the mandatory processes that the franchisee must use to ensure brand uniformity, the types of payments to be made and their calculations, the mandatory look of the physical premises, and much more. The agreements vary from industry to industry and evolve over the years, but there are general types that stand out.
Single-Unit, Multi-Unit and Territorial Franchises
A single-unit franchise is a contract in which the franchiser grants the franchisee the right to operate a single franchise in a given location. This is typically used for smaller operations such as a small restaurant or a retail store. For a new entrepreneur, this can be an interesting way to start a business with a turnkey approach. Typically, the franchiser supplies everything needed to get the business up and running, but the costs are borne by the franchisee. A franchiser may also grant a franchisee the right to open several franchises in different locations, known as a multi-unit franchise. While this may sound interesting, potential franchisees should keep in mind that this right often comes with the obligation to open locations in a given time period, which can entail large investments of capital. A hybrid version of this arrangement occurs when a franchiser grants a single-unit franchise but includes a right of first refusal in favor of the franchisee over a given territory. For example, a franchisee that opens the first restaurant for a large chain in a given city may be given the right to open the second and third locations before those locations are offered to anyone else.
Master franchises are a much broader arrangement and imply that the franchisee already has substantial experience and sometimes even a link with the franchiser. In this relationship, the franchiser grants the right to the master franchisee to all franchises in a given country, region, or even continent, The franchisee effectively becomes the franchiser for the given area and may grant subfranchises. For example, McDonald’s Restaurants of Canada is the master franchiser for all of Canada, with many of the 1,400 restaurants owned by single- or multiple-unit franchisees.