Just like the world of investing is as diverse as the people in it, so is the world of franchising. Investors choosing franchising as a concept to invest their funds into should be aware of important differences in franchising opportunities and what they mean.
In particular, the two primary distinctions that are often confused but shouldn’t be are between multi-unit and area developer franchises. In this article, we explore each one in more detail to give you a better overview of your investment options. Let’s begin.
What is multi-unit franchising?
In order to look at multi-unit franchising, it’s important to look at single-unit franchising first. Single-unit franchising offers a prospective franchisee to purchase the rights to operate their business in a given (single) location for a certain period of time.
Now we build onto this and introduce multi unit franchising. Multi-unit franchising essentially builds onto the single-unit franchising model and simply adds more units to the franchise agreement.
If you are wondering what is the difference between single-unit and multi-unit franchises, essentially, it is about the number of units in a specific geographical location that the franchisee will run for the duration of their franchise agreement.
Below, we explore the pros and cons of investing in a multi-unit franchise.
Pros
Curious about what is the advantage of a multi-unit franchise? Multi-unit franchise opportunities:
- Enable franchisee investors to scale at a more manageable pace
- They are also able to reap the financial rewards of several “separate businesses” operating for them
- Lower overheads
- Business stability
Cons
Some of the disadvantages that come with multi-unit franchising include:
- A higher investment risk
- Greater difficulties in focusing on a particular unit
- It requires hiring more staff
- It can lead to a strained franchisor-franchisee relationship if the units are not performing well
- Greater competition from other multi-unit owners operating within the same market
What is an area development franchise?
We now turn to what area development franchise ownership is. Firstly, an area development franchise is managed by an area developer, who is also known as a master licensee. If you want to know what a franchise area developer does, they begin by identifying a certain franchise opportunity in a location where it doesn’t exist yet.
They then enter into a franchise area development agreement with the franchisor to develop multiple units of the franchise in a given location, say a country, and do so within a stipulated time period.
For this purpose, an area development franchise agreement is signed and while the investment may be considerably higher as the area developer will need to recruit franchisees to run the units and enter into further agreements with them, the benefits can be outstanding.
Pros
So, what are the benefits of area developer franchises? Franchise area developer opportunities often come with:
- Increased diversification of one’s investment portfolio of resources to reduce risks, such as economic fluctuations
- Greater exclusivity, which grants the area developer more control over the profitability of the franchise business they are developing, giving them a handsome share of the profits
- Another benefit includes potentially reduced franchisee fees due to the financial incentives offered to open multiple units. While the standard franchise fee is paid, there are reductions in the fees for each subsequent unit that’s opened
- Area developers can also benefit from lower royalty fees once they’ve established a certain number of locations
Cons
And now we answer the question: what are the area development risks for franchisors and franchisees?
- For franchisors, one of the biggest risks associated with signing an area development franchise agreement is trust. The franchisee needs to be the right candidate who has the capacity to manage all the units in the territory effectively and profitably. Failure to do so can result in a loss in brand reputation and brand dilution, as well as lost profitability.
- The prospective area developer should ensure the franchise’s culture, objectives and values align with theirs before signing the area development agreement
- Developing a new territory is a lot of work for both franchisor and franchisee and requires a lot of drive and determination
- For area developers, the investment into an area developer franchise opportunity is accompanied by significant costs
- Failure to maintain brand standards through inconsistent products and/or services can damage the brand
- Area developers have to work within allocated time frames to ensure compliance with the area development agreement
What is the difference between multi-unit franchising and franchise area developer?
The key differences between multi-unit franchising and a franchise area developer are that the area developer acts as a sort of “mini-franchisor”. They are responsible for developing a new territory by recruiting franchisees and getting the business off the ground. While they do receive certain levels of support from the franchisor, they also benefit from the profits the franchisees in that area make and are permitted to collect royalties.
On the other hand, a multi-unit franchisee is responsible for say three or five units or more. While they can enjoy the profitability that each unit makes, they are still responsible for paying royalties to the franchisor. They also tend to operate within a smaller geographical area and their initial investment is much smaller than an area developers would be. While they can also receive discounts for each new unit acquired and scale their business slowly, area developers tend to build at quite a fast rate.
Conclusion
In this article, we’ve explored questions such as what is multi-unit and area development franchise ownership and what is an area development agreement, among other things.
In short, an area developer franchise is a franchisee that acts as a mini-franchisor within a geographical territory over a predetermined period of time. While the multi-unit franchisee also operates their business for a given period of time as stipulated in the franchise agreement, there are other essential differences worth considering.
If you are on the lookout for profitable franchise opportunities to invest in, then the Belvoir Franchise Group is an ideal choice to consider. With Belvoir at your side, you can grow at your own pace, within your budget and expand as quickly or as slowly as you are comfortable with.
While we do not offer area developer or master franchise opportunities, we do encourage multi-unit franchising to aspiring entrepreneurs who are ready to take on the task while reaping the rewards
To learn more about our franchise opportunities in the lucrative property industry, get in touch with us today.
