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If you are considering franchising your business, you will be thinking about how to structure your franchise arrangements. You can choose between multiple structures; deciding between them is integral to your franchising journey. This article explains how franchises are structured and examines the business models available within franchising.
Franchising
The franchise model allows entrepreneurs to own and manage a business under the umbrella of an established brand. This reduces some risks associated with starting a new business from scratch and building its brand from the ground up.
There are legal structures for businesses in the UK. However, a franchise structure is a business model rather than a legal structure. Your business will have a legal structure and so will those of your franchisees.
The franchising model involves a franchisor granting a franchisee the right to use their established business model. If you franchise your business, you will allow the franchisee to use your branding, products, and services in exchange for an upfront cost and ongoing fees. This is the essence of the franchising business model.
Franchise Relationship Structure
A franchise is a separate business from the umbrella of the franchised business. If you franchise your business, the franchisee will sign a franchise agreement, which allows them to set up a company that operates under your brand’s name and operating system. The franchisee would then set up their franchise with your help. This allows you to expand your brand without burdening yourself with the day-to-day functions of the franchises.
A franchise agreement forms the basis of your arrangement with each franchisee. This contract is legally binding on both you as the franchisor and the franchisee. Multiple franchise agreements form a network of franchises that operate independently from one another but under the umbrella of your brand.
Discover the key legal and commercial issues to consider when buying a franchise.
Take Costa Coffee, one of the most popular UK franchises. Each unit of Costa is a separate business, but it operates under the Costa brand umbrella.
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Single and Multi-Unit Franchise Agreements
There are different ways of structuring the franchise agreements you share with franchisees. The following table outlines these structures.
| Structure | Explanation |
| Single-unit franchise | In a single-unit franchise structure, a franchisee operates one unit in one location. This option is favourable when bringing on somebody new to the franchise industry or wanting to manage a single unit. |
| Multi-unit franchise | In a multi-unit franchise structure, a franchisee operates multiple franchise units or locations of the franchised brand. The franchise agreement will stipulate that the franchisee can open and operate several units. This structure can work well for experienced franchisees or people with relevant industry experience. |
| Master franchisee | A master franchisee can manage units and recruit other franchisees within a designated area. |
| Area development agreement | Area development franchisees typically open multiple units in their designated areas. An area development agreement gives franchisees exclusive rights to develop their franchises within a particular area. You cannot recruit other franchisees to work in this area. |
The key differences between these structures are the level of responsibility and the number of units a franchisee will manage. Single-unit franchises operate in one location, whereas multi-unit franchise agreements mean franchisees oversee multiple. The choice between these structures depends on the franchisee and your assessment of their capabilities. Master and area development models can provide franchisees with additional responsibilities.
Factors to Consider When Choosing Your Franchise Structure
Selecting the right franchising structure is crucial. Once you are in a franchise arrangement with a franchisee, you are bound to the terms of the agreement.
You should consider the following factors when deciding which franchise model to adopt:
- your business model and goals;
- franchisee capabilities; and
- market and territorial considerations.
Tailor the franchise model to your business. Consider the market size within the territory you want to expand your brand into. You may not want somebody to set up a multi-unit coffee shop franchise with an area development agreement within a quiet rural area. Of course, this depends on the type of your business. Alternatively, a rural area may work well for a farming equipment franchise.
Key Takeaways
Franchising in the UK involves a franchisor granting a franchisee the right to use their established business model. Franchise structures include single-unit, multi-unit, master franchisee arrangements, and area development agreements. Choosing the correct format depends on factors such as your business model, the capabilities of prospective franchisees, and market conditions. Tailoring the franchise arrangement to your brand’s needs is crucial.
For help with franchising your business, LegalVision’s experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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