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Different types of franchises - PART 1

Franchisees are usually classified simply as single-unit, multi-unit, or master ownership. However, there are more types of franchises to consider before buying one.

Here we have tried to put all the different franchise ownership models in one place by classifying them in separate divisions. We start with the most popular one

Franchises can be classified in different types.

Franchises can be classified in different types.

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Single-unit, multi-unit, master franchise or area developers:

Single-unit franchises are the cornerstone of the franchise system. This type of business does not demand as much investment and experience as the other three types in this category. Usually, single-unit franchisees participate actively in the daily operations of the business. Many times single-unit franchises are owned by families who do not intend to expand their business. However, they can easily be grown into a multi-unit franchise network.

Single-unit franchises receive territorial protection which guarantees owners they will not compete for customers with owners of the same in their area of operation.  

Multi-unit franchises consist of two or more units owned by the same entrepreneur. This type of operation offers many advantages including the reduction of risk associated with starting a new business. Entrepreneurs are familiar with the franchise system and know how to make the business successful. Moreover, companies usually sell franchise rights to existing franchisees at a lower price. They give discounts for each additional unit.

Entrepreneurs can start with a single unit and grow their business in time or jump straight to multi-unit ownership.  

Master/regional franchise – Master franchisees act as franchisors within their area of operation. This type of ownership is also called regional since exclusive franchise rights are given for a specific territory ranging from a small neighborhood to a country or a large geographic region. Master franchisees don’t work with clients. Instead, they are in the franchise business. They are responsible for recruiting new entrepreneurs, selling franchise rights and opening new franchises. They control the location and the number of franchised units within their territory. They are also the ones who train and provide ongoing support to franchisees.  

Single-unit owners pay start-up fees and royalties to master franchisee who in turn pays fees to the franchisor.

Master franchises are most commonly used for fast expansion in areas or countries where the company currently has no presence. However, not all companies offer master franchise opportunities.

Franchise area developer- Area development lies somewhere between multi-unit and master franchise ownership. Area developers differ from multi-unit franchisees in they operate a greater number of units on a larger territorially protected area. Unlike master franchisees, area developers usually do not provide ownership rights to other entrepreneurs.

The number of new units an area developer opens and their location is predetermined in the franchise agreement. The opening date of each unit is also scheduled in advance.

Franchisees pay a one-time start-up fee and a development fee for each new franchise. Some companies offer fee discounts for each new unit.

Fully-committed or passive franchise: Passive franchise ownership is where entrepreneurs generate revenue from their franchise business without being part of its day-to-day operations. Many franchisors require franchise owners to manage their business themselves rather than to hire other people to do it. The reason for this is that owners are more dedicated to the business than managers are and without hesitation would go the extra mile to find new customers and keep the existing ones. 

 Click here to read PART TWO of the article.