Franchising is a method of distributing products or services involving a franchisor, who licenses its mark and business system and a franchisee, who pays an initial and ongoing fees for the right to conduct a business under the franchisor’s mark and system. The franchisee funds the establishment and operation of the franchise business according to the franchisor’s standards and specifications. Most franchisors provide initial and ongoing training, pre-opening assistance in site selection, real estate and construction, and ongoing assistance thereafter. The franchisor has the right to change the system over time by changing its operations manual, and the franchisee is then bound to implement the changes.
Types of Franchising
A single unit franchise is an agreement where the franchisor grants a franchisee the right to open and operate one franchise location. This is the most common and simple type of franchise relationship. A multi-unit franchise is an agreement where the franchisor grants a franchisee the right to open and operate more than one franchise location. There are primarily two types of multi-unit franchise agreements: (1) area development agreements; and (2) area representative agreements (also known as master franchise agreements). Under an area development agreement, the franchisor grants a franchisee the right to open a certain number of franchise units in a specified territory over a specific amount of time. Under an area representative agreement, the franchisee not only has the right to open and operate franchise units itself within a specified territory, but also has the right to sell franchises to other people within that territory. An area representative is essentially a sub-franchisor, and thus takes over many of the responsibilities and benefits that the franchisor would otherwise have for the franchise units within the area representative’s territory.