Franchise Types  

A good starting point to explore franchises begins with understanding the types of franchises available to you. 

There are 5 types of franchises. 

• Single unit franchises  
• Multi-unit franchises  
• Area Development Franchises  
• Area Director/Master franchises  
• Co-Branded franchises  

Single Unit Franchises: 

The franchisee purchases the right to operate one franchise. This is the most common type of franchise investment for most entrepreneurs.  

Territory : Depending on the type of franchise purchased the territory may be described in several different ways. For example a food franchise or a retail franchise the territory is usually defined as a specific radius around the store. A service franchise may be provided a territory with a specific population or number of qualified households. 

Level of participation: Most franchisors require single unit operators to be actively involved as owner operators. Some do allow passive operators that hire a manager to perform the day-to-day tasks. 

Typical capital required: The franchisee will normally need to have from $25,000 to $100,000 in liquid capital on a total investment of $50,000 to $400,000. 

Multi-Unit Franchises 

The franchisee purchases more than one unit. The franchise fee may be reduced for additional units. The franchisee can take advantage of the economies-of-scale by spreading the business costs across multiple units. Local advertising costs can also be spread across the units purchased, if they are in the same geographic region.  

Territory: The territory is based on the location of each unit; with each unit having its own exclusive territory. 

Level of participation: The franchisee will provide the oversight of all of the units, and will typically have a manager or a key employee managing the individual units. The dynamics will change if there are many units opened, where the franchisee would typically have a General Manager that oversees all of the units. 

Typical capital required: The initial franchise fees will normally be paid up-front. So, the capital required depends on number of units purchased. The total investment depends on the number of units also. Many times a schedule is negotiated that indicates when the individual units will be opened. 

Area Development Franchises 

The Area Developer franchisee would contract for a specific geographic region and a specific number of units to be opened based on a predetermined development schedule. The Area Developer franchisee has an exclusive and protected area where no other franchisees would be allowed to open a franchise. It is common to expect discounted franchise fees from the franchisor that provides a significant benefit to the investor. 

Territory: The franchisee maintains an exclusive territory as long as the opening schedule is maintained. The territories typically range from a small city to parts or all of a larger city.  

Level of participation: The franchisee will be very involved in the beginning stages of the first location to make sure it is successful. Often with the help of the franchisor, the franchisee will also need to be looking for qualified real estate to open the next few locations. Once several locations are open, the franchisee will need additional assistance to manage several units. 

Typical capital required: $100,000 to $250,000+ initially to secure the area, pay all franchise fees, and have additional start-up capital. The franchisee will then need to be able to finance the rest of the start-up costs for each of the franchises as they open. 

Area Director/Master Franchises: 

An Area Director/Master franchisee, sometimes called a Regional Developer, secures the rights to a larger area than that of an Area Developer. The Master Franchisee, in addition to opening his own franchise at a much reduced franchise fee and royalty, is expected to recruit single unit franchises, multi-unit franchises and area development franchises and receive a portion of the franchise fees. The Master Franchisee usually receives a portion of the royalties paid by each franchisee. There may be additional income available from distribution and sale of products to the franchisees in the area and possibly even some real estate interest. The master franchisee will usually want to open, or be required to open, and operate at least one unit (pilot location), for income, sales validation and use as a training center. The multiple income sources for a master franchise are extremely lucrative. The initial investment is low compared to the total equity to be realized from a master franchise territory. The flexibility of business disciplines are also the greatest at this level, but requires the candidate to demonstrate business development, sales & marketing and management experience can skills.  

The above description is different when the master is a sub-franchisor rather than a sales agent for the area. When a master is a sub-franchisor it takes on the characteristics of a franchise and normally must meet the same legal requirements as the franchisor in the state of operation. The discussion of a Master, as a sub-franchisor, should be discussed on a one-on-one basis. 

Territory: Depending on the population base, the territory can range from a large metropolitan area to an entire state or even several states or country. It is an exclusive area and will remain exclusive as long as the master franchisee meets the sales and development schedule of franchises in the territory. 

Level of participation: The Area Director/Master franchisee will usually set up and operate at least one unit and use a manger to manage it while recruiting other franchisees in the territory. Typically, the Area Director is responsible for recruiting the franchisees in the territory (but, not signing that contract which is done by the franchisor). The Area Director may also be responsible for training the new franchisees in the area. The Area Director will be responsible for supporting all of the franchisees in the Area Director territory. Very rarely is an Area Director/Master franchisee "hands on" in a unit franchise. They tend to spend more of their time operating like a business consultant or coach to their franchisees to help them become successful. 

Typical capital required: Depending upon the size of the territory and the number of units to placed in the territory, the Area Director/Master franchise fee will range from $100,000 to $500,000. This is needed to acquire the territory and for initial liquid capital to start the area development. The total investment may or may not include specific investment costs related to the "pilot franchise". Financing will be secured for the start-up of the unit franchise. 

Co-Branded Franchises: 

Normally, this pertains to a franchise company that offers more than one franchise brand. The franchisee purchases the right to operate two franchises at the same location. This is more commonly seen in food franchises where the franchisee purchases the right to operate two distinctly different but synergistic franchises, such as a chicken franchise that coexists with a hamburger franchise. These franchises usually share seating area and kitchen areas. 

Territory: Depending on the type of franchise purchased the territory may be described in several different ways. For example a food franchise or a retail franchise the territory is usually defined as a specific radius around the store. A service franchise may be provided a territory with a specific population or number of qualified households. 

Level of participation: Most franchisors require single unit operators to be actively involved as owner operators. Some do allow passive operators that hire a manager to perform the day-to-day tasks. 

Typical capital required: The franchisee will normally need to have from $100,000 to $200,000 in liquid capital on a total investment of $250,000 to $500,000.