The terminology of Franchising

There is no universally accepted set of terms used to describe the different parties involved in franchising. However, the following terms are commonly used.

1. Franchisor

This is the proprietor of the franchised system. It owns the know-how of the concept and the brand name. It grants franchises to third parties.

2. Franchisee

This entity is granted by the franchisor the right to carry on business using the franchisor's know-how under the franchisor's brand. There are, however, various types of franchisee, depending upon what rights they are granted.

2.1 Unit franchisee

This franchisee is granted the right to operate one unit or outlet of the franchised business - a unit franchise. This is the simplest and most common form of franchising. A single franchisor may ultimately have several hundred different unit franchises.

2.2 Master franchisee

A master franchisee is granted the rights to a substantial territory - usually a whole country. It will then grant unit franchises to unit franchisees throughout the territory. The master franchisee is in many ways similar to a franchisor. The term "sub-franchisor" is therefore sometimes used instead of master franchisee and unit franchisees referred to as sub-franchisees. This is the structure adopted by many franchisors to enter a new country. The master franchisee needs to have sufficient drive and resource to fully exploit the territory and control the unit franchisees territory.

2.3 Regional franchisee

In a geographically large area a franchisor, or master franchisee may decide that it is commercially appropriate to further divide the territory up with separate "regions" and grant a master franchise for each separate region. These franchises are known as regional franchises or sometimes area franchises. The area term is commonly used in large countries such as the USA, where regional franchise for one or several of the different states are felt to be appropriate.

Multiple franchises

Some franchisees operate not just one unit, but several. These are referred to as multiple franchises and usually have a large number of individual unit franchise agreements - one for each unit.

 

Developers

Rather than be a master franchisee and sub-franchise to unit franchisees, large corporations sometimes prefer to exploit their territory by opening outlets themselves. These are known as developers. They have a single developer agreement which allows them to open many units. In practice, master franchisees also usually run some of their own outlets in the territory. Developers therefore need to have considerable financial and other resources. Large corporations often find it culturally difficult to easily accept that working with franchisees means working with independent business people who cannot simply be "hired and fired". They are therefore more likely then anyone else to be developers.

Even master franchisees should operate one or two "pilot" operations themselves so that they become fully familiar with the business at an operational level and can "localise" it to improve its chances of success.