There is no one-size-fits-all strategy to building a strong culture, but there are many paths to success and many ways to win the race.

By Brian Balconi

At the recent IFA Annual Convention, a franchise salesperson could be overheard celebrating a deal: “I just sold a three-pack!” Then someone shouted, “I just sold California. We’re putting out a press release announcing 100 more stores under development.” Nearby, a franchise executive sipped iced tea with the contentment from signing 10 individual franchise agreements that month. Which strategy won the race?

Consider four strategies used to grow franchised brands: individual location (one at a time), multi-unit development, master franchising, and area representative.

Individual Location

Growing the franchise system one location at a time is the simplest and easiest strategy, but also has its limitations. This plan for growth works best when the franchising strategy is heavily reliant upon an owner-operator model, where the goal is to have many franchisees who have one or two locations — often referred to in franchisor boardrooms as a “onesie twosie” strategy. 

Additionally, to foster a high level of operational excellence, some franchisors grant only one location to a new franchisee in order for the franchisee to first prove his operational capabilities before being considered for multiple locations.

This model allows for more prospective franchisees to qualify, as it has lower financial requirements. But it may also lead to slower growth and more difficulty managing the system-wide growth. If you’re selling individual franchises and you’re stuck in first gear, perhaps it’s time to “rev up” franchise development by using one of the strategies noted below.

Multi-Unit Development 

Many, perhaps most, franchisors pursue a multi-unit (or area) development strategy, either as its sole growth strategy or in conjunction with individual location growth. In this strategy, franchisors provide the franchisee with a protected territory in exchange for the franchisee agreeing to open a certain number of locations in a set time. (Note that the protected territory usually carves out non-traditional locations and, therefore, for legal reasons the term “exclusive territory” is generally not used. Check with your lawyer.) If the franchisee does not meet the development schedule, then the franchisor may take away the protected territory.

Multi-unit development strategies involve entering into a development agreement that contains a schedule typically requiring franchisees to develop anywhere between three locations to dozens or more, and a territory that may be anywhere between a few square miles to an entire metropolitan area or state(s). This approach will likely speed growth as franchisees will be required to open locations by specific dates. It will also allow the franchisor to better manage growth.

Typically, franchisees pay an up-front fee, which may be a percentage of the initial franchise fees for the locations to be developed or a lump sum to compensate the franchisor for setting aside the territory. 

Multi-unit development will attract larger and more growth-minded prospective franchisees, but it limits the pool of potential franchisees due to higher financial requirements. A downside of this model is that it ties up territory. Accordingly, it is very important to properly vet prospective multi-unit franchisees, their operational skill sets, and management skills. Also, the prospect must have a well-thought-out business plan that allows for building an infrastructure to scale operations.

For most franchise systems, multi-unit development will add power to their franchise growth.

Master Franchising

While master franchising is most often thought of by U.S. franchisors as an international growth strategy, it can also be used within the U.S., either as one large territory or broken out into numerous territories. In the master franchising model, the master franchisor grants the master franchisee the right to open his own stores, as well as subfranchise to other franchisees. The master franchisor provides a protected territory and requires the master franchisee to open them himself, or through his subfranchisees, a set number of locations in a period of time. This provides a great upside for the master franchisee, but also requires more from him. The master franchisor typically has less support obligations and less investment but in exchange for that gives up more control, and only receives a portion of the unit royalty and unit initial franchise fee.

The master franchisee must also set up an infrastructure for being a subfranchisor including operational support, training, marketing, etc. Additionally, the master franchisee must absorb the administrative burden of preparing and implementing a franchise disclosure document (for territories in the U.S.) and coordinating it with the master franchisor.

Although the front-end work will be more involved and will need to be completed before you get out of the gate, for some franchise systems this may be the best strategy.

Area Representative

Another strategy for franchise growth is known by a number of names: area representative, area franchisee, area developer and development agent. As there is not one universal name for this model, speaking to others and even to other experienced franchise executives often requires a lengthy description of the model to ensure both people are speaking about the same structure.

An area representative franchise structure, or simply “area rep” for short, has some similarities to the master franchise structure but in many cases, is more efficient and comes with less administrative burden.

The benefits of using this structure are faster growth, acceleration of income, and additional support without use of resources. Downsides include potential quality control and consistency issues.

Area reps are granted a territory, which is typically larger than a multi-unit development agreement. Within that territory, the area rep will provide certain support services as outlined below. In exchange for this, the area rep receives a portion of the initial franchise fee and a portion of the royalty.  

An area rep’s and the franchisor’s duties can vary with this model. An area rep’s duties often include handling franchise sales in their territory, assisting with site selection and real estate development, and ultimately getting the store open. The area rep also provides operational support. Often, the area rep is required to own and operate one franchised location in order to stay current with the system’s operations and to be used as a training store.  

The franchisor often has a variety of duties such as retaining the franchise agreement, FDD and related legal obligations, which allows corporate to retain the right to enforce the franchise agreement and handle collections and franchise defaults. The franchisor also retains final approval of all new franchisees and sites. The franchisor may handle national lead generation, such as PR and advertising, and charge the area rep a fee for this. Corporate typically provides tools and guidance on site selection and provides store designs.This model has some similarities to master franchising but the franchisor gives up less control, which may allow the area rep model to gain 
some efficiencies.

There is no one-size-fits-all strategy but there are many paths to success and many ways to win the race. At the next IFA convention, we’ll share our successes together.

Brian Balconi is President – USA of Retail Food Group, the franchisor of Gloria Jean’s Coffees and It’s A Grind Coffee House, and includes Di Bella Coffee.

Search