Everyone is familiar with franchises we see in our towns such as McDonalds. Body Shop and Holiday Inn. These are business method franchises (also known as Business format franchising) whereby a franchisor grants a license to franchisees to sell products or services, using the franchisors trade name and business method.
The franchisor provides a format for managing and operating the business, a complete systems as to how to operate the franchise.
What then are different models that can be set up to operate a business method franchise? You can sign each franchise to operate a single unit/business or may agree that a franchisee plays a bigger role in helping to roll out the franchise network. There are differing ways you might want to consider doing this before setting up your franchise operation and these are some of the options:
Unit Franchise/Direct Franchise
The franchisor grants a unit franchisee (i.e. a franchisee running an individual franchise outlet/business) the right to operate an individual unit or units in the relevant territory e.g. UK or a specific geographic areas in the UK such as a county or a town or part of a town.
In a master franchise a franchisee has the right to exploit the franchise in a geographic area and to grant sub franchises to individual franchisees. In other words, the franchisee has the right to exploit and develop the franchise network and enter directly into franchises/sub-franchises. The end result is that the master franchisee then holds sub franchisees and your master franchise agreement will carve out your share of franchise fees and the master franchise fees payable to you.
A joint venture can be put in place whereby the franchisor and a business become joint shareholders in a master franchise company. ‘Joint’ does not of course, necessarily mean equal shareholdings if you feel that you are contributing the greater of part of the knowledge and/or resources you will not want to agree a 5050 split.
This is an alternative to master franchising whereby a franchisor grants rights to a franchisee under the terms of a development agreement to open a number of franchised outlets itself and introduce third parties as unit/individual franchisees. However, this differs from a master franchise in that the development agreement would not allow the franchisees to grant sub-franchises merely the right to operate further units usually in a specific location and likely to be dependent on the franchisee achieving certain pre agreed levels of success.
Essentially it comes down to encompassing in a contract, with your franchisee or joint venture partner, the commercial arrangement you want to see in place in order to get your franchise successfully set up and rolled out in line with your goals.
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