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What’s in a title?

Written by : Michel Gagnon
2008-01-15
There are many titles used in the franchising world to describe different levels of players in the industry: single franchisee, multi-unit franchisee or area developers, regional franchisors, master franchisor and franchisor. Each of these terms describes a different level in the system.

As most people know, a franchise system is basically made up of two parties, the franchisee and the franchisor. The franchisor owns the System, which typically includes a concept (trade mark, name & logo, recognizable product, service or store) and a formula to help the new franchisee (training program, ongoing support, policy & procedures manual). The relationship is very symbiotic, since both parties are working towards the success of the system, which benefits the franchisee with profits and the franchisor with royalties. In a simple system, there is a franchisor and a number of individual franchisees (i.e. each franchisee operating a single franchise).

For the majority of people looking for a franchise, the single operation is the preferred option. The franchisee provides hands-on implication in his/her business, supervises employees, understands all the particularities on the market and the clientele of the establishment, and deals with customer issues and relationships in a direct manner. For most franchisors, the single unit franchisee is also the best option, since the franchisor will know that the owner is on site, ensuring the protection and growth of the business.

From the initial conception or as the system expands, the franchisor may choose to offer larger territories to more sophisticated franchisees, who will eventually own more that one unit (sometimes called multi-unit owners or area developers). These area developers are not sub-franchisors, meaning that they are not allowed to franchise their unit to other franchisees. They are often allowed, if they wish, to have partners in each of the stores and in most cases, the franchisor will ask the area developer to control the majority of the outstanding shares. However, in some cases the area developer is initially comprised of a number of partners, passive investors and operators. Typically, in addition to a franchise agreement for each location, there is an area development agreement signed between the parties, which outlines a store development schedule over a definitive timeframe.

Another way for a franchise system to expand is to grant regional or master franchises to individuals or organizations that in turn will grant either single or multi-unit franchises within the geographical territory that they operate within. In most cases, international franchisors will prefer to go the master franchise method when expanding outside their country of origin. The chosen master franchisor has the market knowledge and understanding and can do a better job in adapting and growing the system in this new market. Certain systems also choose to develop the Canadian market with regional franchisors working in close relationship with the national franchisor. Because of the regional diversity and size of Canada, some franchisors will, as an example, grant regional franchises for Western Canada, Ontario, Quebec and the Atlantic provinces.

These master or regional franchisors will share the initial franchise fee and outgoing royalties with the franchisor and will of course share in the duties and responsibilities of granting and supporting the franchisees within the territory.

For both the franchisors and the franchisees, these methods of expansion provide great benefits and opportunities. As business models evolve, franchise opportunities become more sophisticated and will attract people who may not have thought of franchising as their first choice of business format, but the opportunity of either being an area franchisee or a regional/master franchisor may be more appealing. In many cases, these operations are large and complex and very profitable.

In choosing these larger partners, franchisors are attracted to groups or individuals with substantial means with the management skills to run complex businesses. In fact, in some cases, interesting candidates can be found with existing franchisors diversifying their core business resources or other multi-unit owners of other franchises leveraging their financial and management resources.

Franchising as a business format is growing and doing well in Canada. It encompasses almost all aspects of businesses, from restaurants to retail, business and personal services, and home based businesses. In recent years, we have seen an increase in co-branding (different systems sharing the same premises or one retail location offering different brands) and more and more franchisors are using area developers or master franchisors.

As you investigate a franchise system, the keys ingredients are always: affinity with the business, financial and managerial capacity, short versus long term plans, commitment to owning a business instead of a job (with all the positive and negative aspects!), operating and growing the business day in and day out! Thereafter, you can investigate what your preferences are and what the requirements are to become either a franchise owner or a multi-unit owner!

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