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Beyond the Basics
Beyond the Basics The classic business format model expanded over time into more complicated forms, which allowed franchisors to grow more rapidly and at less cost. Franchisors created the master franchising model, which involved the selling of development rights to third-party entities who took over many franchisor duties. There are three main variations to the master franchising model: 1. Master Franchising 2. Sub-Franchising All fees and royalties are paid directly to the sub-franchisor. It is solely responsible for all recruiting, training and on-going support, and passes on an agreed upon percentage of all incoming fees and royalties to the parent franchisor. In a sub-franchising relationship, the potential franchisee has to be doubly careful in his or her investigation. He or she must first make sure that the sub-franchisor has the necessary financial, managerial and marketing skills to make the program work. Secondarily, the potential franchisee has to feel comfortable that the parent franchisor can be relied upon to come to his or her rescue if the sub-franchisor should fail. 3. Area Development In return for the rights to an exclusive territory, the area developer pays the franchisor a front-end development fee and commits to develop a certain number of units within a specified period of time. The front-end fee is generally significantly less than the sum of the individual unit fees. Individual franchisees within the territory pay all the contractual franchise, royalty and advertising fees directly to the parent franchisor. The area developer shares in neither the franchise fee nor in on-going royalty or advertising fees. Instead, the area developer shares only in the profitability of the individual franchises that it "owns." 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. Next: Franchise Lingo: Law & Regulations |