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.
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 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.
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.
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.
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.
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.
About the author: Dr Callum Floyd is the editor and founder of Franchise-chat, and a senior franchise consultant with Franchize Consultants (NZ) Ltd, New Zealand. www.franchise-chat.com