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Choosing to franchise your business and allow someone else to use: your business model, confidential information, intellectual property, et cetera, can be a difficult decision to make. Franchises take many shapes and forms, and some structures may be better for your particular situation than others. There are several franchise-offering structures available to meet the financial and expansion needs of a new franchisor, three of which are most common: (1) single-unit franchising, (2) area-development franchising, and (3) area-representative franchising.
The most common type of franchise offering in North Carolina is a single-unit structure, meaning that the franchisee owns a single franchise. Buyers of these franchises can range in structure from sole proprietors, partnerships, to large LLCs or corporations.
The other typical form of franchising involves multiple units. Here, another business entity may purchase the right to sell your products or services in multiple locations. Our team of experienced attorneys could explain each of the three-common franchise-offering structures and discuss rights that the franchisor grants to the franchisee, as well as the advantages and disadvantages of each.
Single-unit franchising is the simplest and generally most common franchise-offering structure utilized by new franchisors. Under this structuring, the franchisor sells the rights to use their trademark and business model to a buyer who intends to operate a single location. Usually, a single-unit franchise allows a buyer to keep their costs down in terms of finding a business space, hiring staff, and start-up costs. The franchise agreements governing these single-unit arrangements should reflect what is at stake, so that buyers have full disclosure concerning their financial liabilities and how taking on the mantle of a franchisee may change their lives. In fact, to help many franchisees, these single-unit options provide extensive training and guidance to help the buyer get off on the right foot.
In theory, a franchisor is not precluded from making multiple, single-unit franchise offerings to the same franchisee. However, franchisors generally utilize a different type of franchise-offering structure to grant multiple franchises to the same franchisee, rather than a single-unit franchise-offering structure.
An advantage of single-unit franchising is stability in the franchise-development stage. Granting the right to open and operate a single franchise location one by one assures that each franchisee can focus its attention on making their single location a success, without being distracted by the need to open and operate multiple locations. Another advantage of this type of franchising is that it may reveal early on to the franchisor the prototypical franchisee that will be most successful in the system, rather than discovering a franchisee’s lack of suitability after it has been granted the right to open multiple locations in a specified territory. However, an inherent disadvantage of this franchise-offering structure is that granting the right to open and operate franchises one by one may inhibit the franchise’s initial growth.
Area development franchising, or sometimes referred to as multi-unit or regional development franchising, is a different type of franchise-offering structure that is steadily growing in use. In some cases, businesses may wish to buy the rights to sell a company’s products or services. Here, both parties may benefit from a multi-unit purchase agreement.
A multi-unit franchise agreement grants the franchisee the right to open and operate multiple units within a designated geographic area or territory, subject to a development schedule. This includes the use of an area development agreement outlining business locations to minimize market conflict.
Here, the franchisee is commonly referred to as an “area developer.” The area developer or its affiliates are generally parties to a separate franchise agreement with the franchisor, however, this party does not have the right to grant or sell unit franchises to third parties.
If this type of offering is a success, a franchisor’s product may be able to gain increased market penetration and overall profit with less overhead costs for training multiple single-unit franchisees. Further, in most instances, the franchisor receives a fee paid by the area developer; and in the event this party fails to meet its development schedule, the franchisor generally has the right to cancel the area-development agreement and keep the previously paid fee. However, in cases of failing businesses, the reputation of a product may suffer through such a model. It is important to note that under these circumstances, an area developer is generally allowed to continue operating those franchise locations that have opened and are operating, so long as the area developer is in compliance with its individual franchise agreements.
Therefore, someone should consider the past business dealings of a potential multi-unit purchaser to evaluate whether an agreement for a multi-unit franchise deal is in the brand’s best interest.
Area-representative franchising is a less common franchise-offering structure used by new franchisors. Under an area-representative franchise-offering, the franchisor grants the “area representative” the right to solicit and recruit third parties as single-unit franchisees to open units within a designated geographic market and provide support to those single-unit franchisees.
This franchise-offering structure differs from the two previously discussed in that the area representative is a not a true “franchisee.” Rather, in essence, the area representative is a commissioned franchise salesperson, who also provides support for the franchisor in a geographic area. Therefore, the single-unit franchisees that the area representative solicits or recruits enters into a franchise agreement with the franchisor directly. Nonetheless, even though the area representative is not a true franchisee, the North American Securities Administrators Association requires that a franchisor file a separate Franchise Disclosure Document (FDD) area-representative franchise offerings.
An advantage of this type of franchising structure in North Carolina is that it facilitates accelerated grow of the franchise system. However, the area representative has less responsibility for providing franchisee support. This is important because the franchisor enters into franchise agreements with franchisees who are solicited and recruited by the area representative. Additionally, the area representative usually receives portions of the initial franchise fees and the continuing fees paid by unit franchisees. It is worth noting that, under some state laws, the area representative may be considered to be a sub-franchisor if it provides support services to third parties with unit franchise, even though the representative does not sign unit franchise agreements with third parties.
Pursuing a franchise agreement with a potential buyer can increase your product exposure and profits with minimal stress on your business. However, it is important to choose a franchise structure that fits your needs and goals.
Most franchises are known as single-unit franchises wherein a franchisor can retain more control over their intellectual property and provide more one-on-one guidance to franchisees. In other cases, a person or business may wish to operate several franchises at once. These multi-unit franchises can increase your profits exponentially, but it may be more difficult to enforce your trademark or contractual rights.
A skilled attorney could provide more information about the different types of franchise offerings in North Carolina that is right for your situation. Call today to discuss the options available to you.
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