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Types of franchises according to the organization of the system

Franchising is a type of business that can be viewed from many different angles, and consequently, there are multiple categories by which franchises can be classified. For example, we can classify them according to the type of activity, i.e., the business operations they perform, but we can also consider how franchises communicate with their franchisees and how they transfer their knowledge, their “know-how.”
The third category, which will be the focus of this article, classifies franchises according to the organization of the system. In other words, we are talking about how the hierarchy within the entire chain is structured. Based on this, we distinguish four types of franchises: direct, multiple, master franchises, and regional representation. In the following paragraphs, we will analyze each of them, explain the basics of how they operate, and highlight their main advantages and disadvantages. Let’s get started!

Direct Franchise

A direct franchise is a type of franchise in which the franchisor signs an agreement with only one franchisee, who then has the exclusive right to use the franchise in a specific territory, but is allowed to operate at only one location. Thus, the English term for this type of franchising, single-unit franchise, accurately describes this business model.
In most cases, the franchisee is also the owner of the location where the outlet is established, and managing it is their daily job, although this is not always the case. Either way, the franchisor in this model grants the right to use the franchise brand and provides the necessary support and training, but there is no intermediary between the two parties.
This is the most common way to start and develop franchises, but problems can arise when the franchisor chooses to expand internationally through this model. This can lead to reduced oversight and support, which could ultimately harm the brand. Additionally, this type of franchising is relatively slow, and although it requires a smaller initial investment, supporting only a single franchisee is financially less efficient than supporting a manager responsible for multiple outlets in a given territory.
Therefore, if your franchise is still in its early stages and you do not have the resources for rapid expansion, this could be a suitable model for your business.

Better Market Penetration

The idea behind a multiple franchise is easy to grasp, as it is, in many ways, the opposite of a direct franchise. Instead of finding just one franchisee who can operate at a single location within a territory, a multiple franchise focuses on opening a larger number of outlets in a given area. For this, the franchisor will need a franchise developer who takes on the responsibility of achieving the set target. However, this person does not have the right to use the franchise brand, as no franchise agreement is signed with them. The developer’s role is simply to find the required number of franchisees within an agreed timeframe and ensure they are trained and ready for signing the franchise agreements.
It can be said that this model essentially involves opening multiple direct franchises, but in this case, the franchisor does not have to worry about finding franchisees and training them, as a dedicated person is employed for this purpose. This approach is certainly more efficient for the franchisor because, through a single developer, they can secure many franchisees in a short time, making such an investment quickly worthwhile. The franchisor also retains a large number of obligations toward the franchisees and is much more directly involved in their operations. However, in some cases, even this is not necessary, and such situations fall into a special category.

Master Franchise

Master franchise is similar to a multiple franchise, but with one important difference: instead of finding a developer, the franchisor finds a master franchisee for a specific territory and transfers to them the right to use the brand within that territory. Thus, in this case, there is an additional layer between the franchisor and the end franchisee.
The master franchisee, in many ways, takes on the role of the franchisor within a specific territory and is responsible for both training and supporting the franchisees. Additionally, the master franchisee can propose changes to the contracts and packages offered by the franchisor, although the final decision still rests with the franchisor. This model can be extremely efficient for the franchisor because it eliminates the need to spend resources managing a particular territory. Instead, the master franchisee is compensated through royalties. There is much less work involved, there is no need to hire people to develop a new market, and revenue continues to flow.
Additionally, this is an excellent model for franchises looking to expand into a market whose operations they do not fully understand, as having a master franchisee familiar with the business environment in the new market can greatly support the brand’s development. On the other hand, the master franchisee assumes significant authority over the operations of an already established brand, which presents a substantial opportunity for substantial earnings.

Regional Representation

The last form of franchise system organization is one that uses regional representatives. They can be seen as a weaker form of franchise developer because they also try to find a franchisee on behalf of the franchisor, but the similarities end there.
The regional representative is not obligated to find a specific number of franchisees within a certain period, and they do not have the authority to sign any contracts. In fact, the main duty of the regional representative is to connect the franchisor with potential franchisees. Additionally, regional representatives will handle marketing and training for potential franchisees, which is often one of the main tools they use to try to interest franchisees in joining the franchisor.
So, it’s about a support role and promoting the franchisor’s brand to increase awareness and enable the regional representative to quickly connect the two parties. In this way, the franchisor has someone to help them expand into a new market while maintaining full control over the entire system.

Conclusion

As you can see, franchises can operate in multiple ways. Of course, it all depends on the franchisor and how they want to expand into a new market, and the resources they can invest are also crucial. Certainly, large corporations can afford to contract master franchises for a specific area, especially if the business rules differ from those in the home country, while smaller companies will more often opt for a direct form of franchising. If all four options are open, the most important factor will likely be how committed the franchisor is to developing the new market. And for all franchising advice, it’s always good to consult experts in the field of franchise consulting.

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