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Types of Franchise Arrangements
The North American Securities Administrators Association, Inc. (“NASAA”) describes the single unit franchise, and the 3 multi-unit structures, as follows: Area Developer, Subfranchisor (aka “Master Franchise”), and Area Representative. These relationships are not mutually exclusive. A franchisor can use a combination of these structures to accelerate its growth and market penetration.
Single Unit Franchise
The “single unit” is the most common type of franchise relationship. Under this relationship, the franchisor grants the franchisee the right to establish and operate one franchise location. Most often, the franchisee is utilizing his/her own management skills and other personal resources to grow the business, and it is generally a “hands-on” activity.
Multi-Unit Franchises:
Area Developer
When a single unit franchisee finds success, the franchisee owner often seeks additional locations. Under the Area Developer relationship-the most common multi-unit relationship, an individual or entity is granted the right to open and operate multiple franchise locations-typically within a specified geographic area- under the terms of a “development” schedule. This relationship can go by many names, including regional developer or multi-unit developer.
Subfranchisor (aka “Master Franchisee”)
The Master Franchise relationship is often established when a franchisor seeks to expand its presence into a new i.e. country or continent. Under the “master franchisee” relationship, the franchisor grants certain “franchisor” rights to the “master franchisee” to establish and expand the franchisor’s brand in such territory. In this type of relationship, the master franchisee is (typically) obligated to operate 1 or more locations, and is obligated to provide initial and ongoing support to the franchisees in the granted territory. In exchange for the fee paid to the franchisor for this “master franchisee” right, the master franchisee usually receives a portion of the franchise fee and ongoing fees paid by each “sub-franchisee”.
Area Representative
Under the Area Representative relationship, the area representative pays the franchisor for the rights to solicit individuals to enter into a franchise agreement with the franchisor (often within a particular territory) as well as agrees to provide franchisee support. However, this right is non-exclusive. The franchisor can directly enter into franchise relationships in the territory. For the fee paid to the franchisor for this “area representative” right, the area representative often receives a portion of the franchise fee and ongoing fees paid by the unit franchisee.
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