Which franchise model is best for you?

Once you’ve decided that franchising is the best way to expand your business, you’ll have to decide on the franchising model you’ll use – a single-unit model or a multi-unit model.

In this blog, we’ll offer an overview of three franchising models: unit or single-location franchise agreements, area development arrangements and master franchise rights. Each model has its own advantages and disadvantages depending on your specific goals and priorities.

Unit franchise agreements

With a unit franchise agreement, you grant a licence to a franchisee to operate a single franchise unit. As franchisor, you’ll generally be responsible for helping the franchisee set up shop by providing assistance with training, marketing, management and other aspects of running the business.

Because you’ll have direct oversight of the franchisee, and typically a direct contractual arrangement, there is the potential to have a high degree of control over your brand. However, if your goal is to expand rapidly by opening multiple locations, unit franchise agreements between you and each individual franchisee may be too much work. Dealing with only one party, rather than multiple unit franchisees, can reduce your administrative burden and allow you to grow more quickly.

Area development arrangements

With an area development arrangement, you grant one party the exclusive right to develop a certain number of franchise units within a prescribed territory and time frame. Provided that the area developer meets its targets, it will enjoy territorial exclusivity.

Area developers own all the franchise units within their territory, which allows for greater quality control. As franchisor, you provide support to the area developer in opening new “company owned” franchise units, enjoying the benefit of dealing with just one party in a given territory, rather than multiple different unit franchisees. Area developers tend to be more sophisticated than single-unit franchisees. While you are required to provide business support to an area developer, they may not require as much oversight or support.

If your area developer fails to meet its development targets, you have the option to terminate the area development agreement and acquire the existing franchise units. Or you could allow the area developer to keep the franchise units subject to certain conditions, including a loss of territorial exclusivity.

Area developer agreements are often used in smaller markets, as opposed to an entire province or country. They’re a great way to expand your business with minimal investment on your part and without granting broad, sweeping rights and exclusivities over larger territories. Finding an area developer with sufficient resources to meet your development targets can prove a challenge, however. It is important to do your diligence in selecting an area developer, and you may want to seek out a partner with previous experience as an area developer or in the same industry as your franchised business.

Master franchise agreements

Master franchise agreements are increasingly used by franchisors entering into large new markets – a province or region of the country – where they’re unfamiliar with the local business landscape. Many American franchises, for example, have used master franchise agreements to enter the Canadian market.

A master franchise agreement will typically grant the master franchisee the exclusive right to develop a prescribed territory – as well as the right to sub-franchise. Similar to an area development model, a master franchise agreement typically requires the master franchisee to develop a specified number of units within a given time frame in order to retain the territory or rights, so you know the master franchisee is motivated.

The master franchisee essentially assumes the role of the franchisor in their prescribed territory. It’s up to the master franchisee to recruit suitable sub-franchisees, who become the owners of individual units. The master franchisee takes on the responsibilities of assisting sub-franchisees with training, marketing and management, significantly reducing the burden on the franchisor. You also benefit from the master franchisee’s familiarity with the local market and existing business relationships.

Because the master franchisee contracts directly with sub-franchisees, it is important to note that there is less direct quality control for the franchisor. You rely on the master franchisee to ensure your brand’s consistency at each location. You will need to make sure that these expectations are clearly communicated and provided for in the master franchise agreement. There are also additional administrative obligations on the franchisor – you’ll still need to provide franchise disclosure documents for the master franchisee and by extension, updated disclosure for their use with sub-franchisees, for example.

While a master franchise agreement can allow you to expand quickly into a large new territory, you’ll earn fewer royalties fees per unit. A typical master franchise agreement will see the master franchisee entitled to keep a portion or percentage of the fees paid by sub-franchisees. However, the master franchisee will bear the costs of recruiting and training sub-franchisees, saving you significant resources over and above the costs savings associated with not having to establish outlets and attracting franchisees in a new market yourself.

What are your goals?

If rapid expansion is your priority, an area development or master franchise model are the two options you’ll likely consider. If you’re entering the Canadian market for the first time, a master franchising agreement can allow you to do so with a local business partner familiar with Canadian laws, customs and buying habits. If you’re looking to grow in a specific region, an area development agreement can allow you to do so with minimal overhead.

If you’re looking to grow your business, the lawyers in our Franchising group have wide-ranging experience advising domestic and international clients on navigating the legal and regulatory requirements that apply to Canadian franchises. Contact us to learn how we can help.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.