Have you ever wondered why some franchises achieve a nationally known household brand awareness, and some do not? Is it because the brand has excellent food? Do they have a superior marketing system? Great public relations? The answer is yes to some extent regarding the business model. However, many times, it's because the franchise requires a new franchise owner to open more than one unit in a defined area. Commonly, some large brands use what is known as a master franchise system. Several terms essentially mean the same thing regarding multi-unit ownership. The terms multi-unit, regional, area, and master franchises are often used interchangeably. I want to clarify the distinctions here.
First, typically franchise companies are looking for the following characteristics of an individual to be awarded a multi-unit License:
- Leadership experience, i.e., guiding others either in your job,
business, school, church, civic groups, sports teams, volunteer groups,
or other organized settings.
- Possess business or financial management experience
- A person seeking a larger-than-normal business opportunity that will
generate notable income and respectable equity over a short period of time.
- Ability to invest at least $200,000 or more obtained through either existing resources, investment partners, or a lending institution.
- Someone coachable in franchise development skills (business promotion, interviewing/qualifying potential franchise candidates).
- Willingness to help unit franchisees build their businesses so the area developer can enjoy a healthy royalty stream
- Candidate must have the vision and the willingness to build a business throughout a fairly substantial market, e.g., a metropolitan area, one or more counties, part of a whole state, or multiple states.
If you checked four or more of these items, you have solid qualifications for building a multi-unit franchise operation. Usually these businesses enable an individual (or family/company/group of investors) to generate more income and build more equity. They also require more work and more significant investments than unit franchises. And they are more challenging to obtain.
However, when the match is right, the rewards are also notably more significant. Family dynasties can be built with multi-unit or regional franchise agreements.
My wife and I owned and built a regional franchise operation for several years, and we loved it. It was a very rewarding experience to build it…as well as to sell it.
TYPES OF MULTI-UNIT FRANCHISE OFFERINGS
Please allow me to briefly outline the different types of multi-unit franchise structures that many U.S.-based franchise companies use today.
Area Development Agreements (ADA's)
Typically, this type of franchise offering allows a person/company/group to build and own more than one unit franchise within a defined geographical area.
Most often, ADA agreements are "single-tier" arrangements. That means that the developer agrees to build all of the unit franchisees in the designated territory themselves (no "sub franchising" to others), and the parent company agrees to provide all of the support to the franchisee (no middle entity between the parent company and the unit franchisee).
These agreements almost always contain a "developmental schedule," in which the franchisee agrees to open "X" number of unit franchises over "Y" months or years. The number of units can vary according to the arrangement between the parent company and the franchisee. By demographic criteria, most companies have pre-determined how many units can be built in a designated territory. Often the initial franchise fees are discounted after the initial unit. In some cases, the investment works out to buy two get one-unit free deal.
Restaurant franchise companies commonly use single-level area development agreements to build their brand throughout a designated area. McDonald’s used this mechanism in their "early days" to create those "McDonald's Millionaires" that you have heard about for years.
Regional Franchise Agreements
Regional franchise agreements are "two-tier" arrangements in which the parent company authorizes the regional franchisee (often called a regional director) to do two things:
1) recruit qualified individuals to own the unit franchise
2) provide local support to the unit franchisees.
In exchange for these two business-building functions, the parent company financially rewards the regional franchisee with both:
- Paying the R.D. a portion of the initial franchise fee for each unit franchise they award in their designated region.
- Paying the R.D. a portion of the ongoing royalties paid by the unit franchisees throughout the lifetime of their franchise agreement.
- Some companies who sell products to their franchisees also include a bonus commission to the regional director based on wholesale purchases made by the unit franchisees in the regional territory.
In essence, a regional franchise owner (RD) is an independent contractor, not an employee, who is awarded the right to build the respective business over a defined geographical area. They are compensated for doing so, AND the R.D. has the right to sell the region or area for a profit.
Several franchise companies use this form of multi-unit franchising to create more rapid business growth throughout a large geographical area, such as a county, a state, or a section of a country. For example, Century 21 used this mechanism to dominate the residential real estate market in the 1970s and 1980s. More recent is Orange Theory Fitness and Massage Envy. It's the best growth strategy for a franchise company.
Master Franchise Agreements
Master franchise agreements are usually the same—or quite similar to—as regional franchise agreements. This term refers to countrywide agreements for a country (or part of a country) outside the United States. Some companies use this designation inside the U.S. also. In most cases, a Master Franchise owner will also produce the Franchise Disclosure Document independent of the franchise company. They are a franchise company by themselves.
Various companies can use these terms differently, so you ALWAYS need to know exactly what a specific company means when using one of these three terms. Two companies can use the same term to refer to two different multi-unit business formats.
Not all companies issue multi-unit franchise agreements, while others require that owners have multi-unit agreements.
All companies that offer these multi-unit, regional, area, and master franchises are very careful about whom they award the license. They want to make sure the person/company/ group/family they select has the financial resources, business experience, and personal characteristics necessary to build their businesses.
Keep in mind that companies that offer multi-unit franchise agreements are NOT seeking experts in the "end-use" of their products or services. Instead, they are looking for individuals with the desire, skills, resources, and support to build LARGER multiple-area businesses.
Typically, they are looking for individuals who can lead people and manage money and time. These are "executive-style" business opportunities. Because of these requirements, the quality of the franchisee is high; hence, the franchise company is strong and can expand and dominate a market quickly.
The multi-unit franchise operation requires a different level of commitment and produces a different level of rewards.
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