Types of Franchise Growth Formats

Within franchising, there are a variety of different growth formats used by franchisors. There are almost as many expansion strategies for franchising companies as there are franchisors in the marketplace. Some franchisors start on a shoe-string and build local and regional domination, while others start offering franchises in all ten Canadian provinces or fifty American states from the get-go.

Still others only offer franchises in non-registration states and notification states. Some work to set up a couple of foreign franchisees to show they are global and international. Another popular strategy is for the franchisor to set up some local franchisees and create a business model like a master franchise, then copy that model by selling master franchises in other markets. Some franchisors simply sell master franchises in foreign markets or areas they do not wish to franchise themselves. 

These formats provide different opportunities for a prospective franchisee. The primary determination of the number of units a franchisee is allowed to operate is financial – a combination of liquid capital and net worth. Following is a listing of the four types of franchise formats available. Master franchising is covered in the previous section:

• Master Franchises
• Area Developer Franchises
• Multi-Unit Franchises
• Single Unit Franchises

Area Developer Franchises

The area development agreement is one of the most popular ways to create multi-unit franchises. The area developer receives the exclusive rights to develop a successful franchise system in a specific geographic area, a proven track record that works, the superior brand names and operating systems as well as a "strategic partner" in the form of a corporate office that's there to give you valuable support, the latest innovations and business expertise when you need it.

Generally, the area developer may either develop individual franchise units for its own account or find other franchisees to buy and operate locations within the territory. In return for the rights to an exclusive territory, the area developer pays the franchisor a development fee and commits to develop a certain number of units within a specified time period. The development fee is generally significantly less than the sum of the individual unit fees. Unlike master franchise agreements however, the area developer does not actually sell or award new franchises - this responsibility remains solely with the franchisor.

Because the area developer's responsibilities are not as broad as a master franchisee, they typically do not receive or share with the franchisor, any of the royalty or advertising fees generated by each unit opened in the territory. More often than not however, the area developer will receive a portion of the initial franchise fee as compensation for recruiting a new franchisee. In essence, the area developer is buying multiple locations over time at a discount, since the franchise fee and (frequently) the royalty fee are less than the per unit rate.

- Territory: The area developer maintains an exclusive geographic territory as long as the development schedule is maintained. The size of the territory may range from a city to parts or all of a county, province or state.

- Level of participation: The area developer will be very involved in the opening of the first store to ensure its success. Another important function will be to look for qualified real estate to open the next few locations. Once several locations are open, the area developer will need assistance to manage the units.