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Whether buying a franchise or looking to franchise an existing
business there are numerous issues to consider. One seldom mentioned
but important area affecting prospective franchisees and franchisors
is deciding on which type of franchising is suitable to their individual
circumstances. This is a complex process as there are several methods
of franchising. With the terms of franchise agreements typically
spanning years, the final decision carries long-term consequences.
Five methods of franchising
Though further variations are possible, most franchise systems draw
from five common methods of franchising. To help illustrate each
method we can consider a scenario involving Jean of Jean’s
Camera Shop and Jim Burton. Jean has decided to franchise her successful
Camera business in the hope of building a nationwide network of
Jean’s Camera stores. In this instance, Jean assumes the role
of the franchisor. Jim is interested in buying a franchise. The
type of franchise Jim could buy from Jean depends on which of the
five methods Jean uses for her franchise system.
Single-unit franchising
The method of franchising most people are familiar with would involve
Jim (or another person, partnership or company) buying a franchise
business from the franchisor (Jean). Jim would then operate the
business in a particular location or area. This is called single-unit
franchising. The result is often a franchisor (like Jean) with
a number of franchisees (like Jim) owning and operating individual
stores in different locations.
Sequential franchising
Sequential franchising is an alternative type of franchising
arrangement. In our case, Jean may allow Jim to purchase a second,
and perhaps even a third, Jean’s Camera franchise. Using sequential
franchising, these additional franchises are granted on a one-at-a-time
basis. In other words, after establishing the second franchise,
Jim would need to prove he was capable of operating both stores,
before being allowed a third franchise. The implication of this
type of arrangement is that it becomes increasingly difficult for
Jim to maintain direct involvement in each of his businesses. Therefore
he would need to hire and manage employees to run the different
stores.
Area development
A variation on sequential franchising is area development.
If Jean used this method of franchising Jim (as a franchisee) would
become an "area developer." Unlike sequential franchising
where Jim could gain an additional franchise only after proving
his capability, Jean from the outset would give Jim (in return for
a fee) the rights to multiple franchises. Jean would then expect
to Jim to establish and manage these stores himself, with the assistance
of hired employees. Using this method of franchising (and the following
two), Jean may also require Jim to establish a certain number of
stores within an agreed time frame.
Subfranchising
The fourth method of franchising is termed subfranchising.
Often called master franchising, subfranchising involves
two levels of franchises: subfranchisors (often called master franchisees)
and subfranchisees. Subfranchisors are like a franchisor in that
they will often be responsible for recruiting and providing ongoing
support to operating franchisees. However, in contrast to the franchisor
with nationwide interests, they are responsible for a smaller area.
For example, Jean could offer Jim a master franchise for the Canterbury
area. Within this area Jim could be expected to attract, select,
train and provide ongoing support to owner-operating franchisees
(subfranchisees). Jean may also have master franchisees responsible
for other regions, such as Wellington and Auckland. Jean would then
manage the subfranchisors who, in turn, manage a number of subfranchisees
in their respective regions.
Area representation
Less common than subfranchising is area representation. Like
subfranchising area representation has two levels of franchisees.
The main difference is that the master franchisees (called area
representatives in this instance) are delegated less responsibility
than subfranchisors by the franchisor. Specifically, the franchisor
will often play an important role in recruiting and providing ongoing
support to franchisees, within an area representative’s region.
Final comment
As illustrated above there is considerable variation in the methods
of franchise agreements available to franchisors and prospective
franchisees. For both parties, this means considering what method
is most appropriate for their individual circumstances. Each method
carries a set of advantages and disadvantages relative to the other
types of franchising. From the point of view of franchisors, like
Jean, my own research is seeking to determine which type of franchising
is most suited to a particular type of business.
For people interested in buying a franchise factors such as level
of available investment, managerial ability and ambition are likely
to play an important role in determining what type of franchising
opportunity would be most suitable. For example if Jim has a lot
of money to invest, has sound managerial skills and plenty of ambition,
single-unit franchising may be too restrictive for his needs. Consequently,
he may want to consider a franchise opportunity that would at least
give him the option of establishing further stores, sometime in
the future.
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DIFFERENT
TYPES OF FRANCHISING
