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What are the Different Types of Franchise Arrangements?

Franchise arrangements are the legally binding agreements between franchisors and franchisees that govern the franchise relationship. When it comes to structuring franchise arrangements, there are typically three different types of franchisor and franchisee agreements.

Single-Unit Franchise Agreement

A single-unit franchise agreement is when a franchisee is given the right to open and operate a single franchise unit at one location.

This is one of the most common agreements between franchisors and franchisees. It is mutually beneficial for both parties as well. For new franchisors, this is a great way to expand their business slowly while keeping a pulse on the franchise’s overall day-to-day operations. For franchisees, this allows them to own and operate their own business while receiving guidance from a franchisor who generally has already invested time into developing systems for success. Additionally, franchisees have the benefit of affordability when it comes to operating a single unit. Developing a single-unit franchise is much less expensive compared to developing several units.

The single-unit franchise operations have found success for many local businesses. Businesses that want to grow, but do not want to directly operate and manage multiple locations, can start expanding using single-unit franchise arrangements. 

Area Development Agreement

Having an area development franchise agreement means that the franchisee, generally called a developer, is allowed to develop a specified number of franchise units in a certain geographical area, often with the exclusive right to develop franchises in that area. That means that no other franchisee for that company would be allowed to develop a franchise in the specified area as long as the contract is valid, although there are often exceptions to this rule. The advantage for the developer to partake in this agreement is that they will be the only one to develop a franchise in a certain area during the time needed to open each of the franchise units, making that franchise more attractive to potential customers.

Another benefit for a developer to take part in a development agreement is that the more franchises they own, the more likely they are to get customers, which in turn means more profit. Another advantage is if the developer needs to buy supplies or equipment for their stores, and they are able to purchase in greater quantities and potentially at a discounted rate, meaning they are more likely to save on costs. However, a challenge associated with a development agreement could be whether the franchisee has the capacity to manage multiple locations efficiently.

Master Franchise Agreement

In a master franchise agreement, the master franchisee, sometimes called the subfranchisor, has the most control over the future of the business in comparison to the other types of franchise arrangements, but the arrangement also imposes additional obligations on the subfranchisor. Along with being able to develop new franchises and operate multiple locations, the subfranchisor can and is generally required to also sell franchises within their location to other potential franchisees. In a sense, master franchisees are like franchisors, except they only operate in a specified area. A master franchisee/subfranchisor takes on similar responsibilities as a franchisor, such as providing training and oversight to the franchisees. The subfranchisor receives franchisee fees and royalties from the franchisees in their specified location and then pays a portion of these fees to the franchisor. This type of arrangement imposes additional legal requirements on the subfranchisor, including the requirement to comply with franchise disclosure laws and state registrations requirements.

If you are a franchisee or franchisor and you are considering one of these agreements, it is beneficial to have a franchise attorney look over your documents. At Mullin, P.C. we specialize in helping both franchisors and franchisees make sure getting the best agreement possible and that is mutually beneficial. Our team has served clients throughout the United States, and we can help you too.