Various Levels of Franchising

What Type of Franchise Arrangement is Best for You?

Understanding the various levels of franchising is almost as important as purchasing the right franchise. Below are the four levels of franchising, which include information on the territory specifics, the required level of participation, and the typical liquid capital requirements. It is best to consider and understand all aspects of each level, before purchasing a franchise.

  1. Single-unit Franchises
  2. Multi-unit Franchises
  3. Area Development Franchises
  4. Master Franchises

1. Single-unit Franchises
A franchisee has the right to operate one franchise unit. Most franchisees enter the world of franchising by owning one unit. It is a great way to get in and understand the system before taking on more units.

  • Territory: The franchisee may have a small radius of exclusive territory to operate within. If it is a retail store, the area of exclusivity may be a two or three mile radius around the store. If it is a home-based business the area may consist of a few specific zip codes.
  • Level of participation: The franchisee is very involved with almost all operations of this type. Even if it is a semi-absentee owned business, the franchisee will want to be present at the business and be as hands-on as possible.
  • Typical liquid capital required: $25,000 to $60,000 initial out-of-pocket investment required on a total investment of $100,000 to $200,000.

2. Multi-unit Franchises
The franchisee acquires more than one unit of the franchise, usually at reduced franchise fees. The risk is lower because the franchisee can take advantage of the economies-of-scale theory; by spreading costs across multi-units, the locations may be more successful. A good sign of the health of the franchise is if many of the franchisees are multi-unit owners.

  • Territory:    There is usually no exclusive territory where the franchises must be set up. The franchisee may have one unit in one part of town with a surrounding radius of exclusivity, and another unit in another part of town 15 miles away or even in another county with its exclusive radius of operation.
  • Level of participation:   The franchisee is less involved with each of the units operations, but will be managing multiple operations and will need to have some level of supervision in each unit. If many units are opened, a general manager and additional administrative and training staff may be needed. The franchisee is more of a general manager when many units are involved.
  • Typical liquid capital required:  $50,000 to $70,000 initial out-of-pocket capital is required to take care of mostly the initial franchise fees. The rest of the investment is usually financed when each unit is opened.