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Types Of Franchise Agreements
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Types of Franchise agreements
Enclosed within the Franchise Disclosure Document (FDD), franchise agreements are legally binding contracts defining the relationship and responsibilities of franchisors and franchisees. This pivotal document, signed at the time of franchise sale, establishes the legal framework for each franchise location.
Within this agreement, franchisors grant license rights to franchisees, allowing them to utilize trademarks, business systems, operations manuals, suppliers, and sell the franchisor’s products and services. It also outlines the franchisee's operational territory and delineates their ongoing obligations, including royalties, minimum financial marketing commitments, adherence to franchisor standards, among other responsibilities. Additionally, it sets out the franchisor's obligations, such as ongoing support and training.
Within this agreement, franchisors grant license rights to franchisees, allowing them to utilize trademarks, business systems, operations manuals, suppliers, and sell the franchisor’s products and services. It also outlines the franchisee's operational territory and delineates their ongoing obligations, including royalties, minimum financial marketing commitments, adherence to franchisor standards, among other responsibilities. Additionally, it sets out the franchisor's obligations, such as ongoing support and training.
four basic types of franchise arrangements
FA
Single-Unit Franchise Agreement
The most conventional form of franchising, single unit franchise agreements (FA) grant franchisees the right to operate a single unit. While effective, building a sizable franchise network this way can be more time and resource-intensive compared to multi-unit models.
Recruiting, training, and supporting multiple franchisees demands considerable effort and investment. Some franchisors permit the same franchisee to enter into multiple unit agreements, allowing them to manage numerous units.
Single unit franchises are especially common in the hotel sector, aligning properties with compatible brands at carefully chosen locations for strategic brand positioning.
aDA
Multi-Unit Franchise Agreement
Multi-unit franchise agreements (MFA) and the more common area development agreements (ADA) allow franchisees to open multiple units within a designated geographic area over a specific timeframe.
These agreements have gained traction in recent years due to their operational efficiency, with multi-unit franchises comprising over 53% of U.S. franchise units in 2024.
Typically, these agreements outline defined territories and development timelines for opening a set number of units each year throughout the term. Franchisees who fail to meet these deadlines risk losing their rights to future unit development and may face reassignment of their defined territory by the franchisor.
These agreements have gained traction in recent years due to their operational efficiency, with multi-unit franchises comprising over 53% of U.S. franchise units in 2024.
Typically, these agreements outline defined territories and development timelines for opening a set number of units each year throughout the term. Franchisees who fail to meet these deadlines risk losing their rights to future unit development and may face reassignment of their defined territory by the franchisor.
ARA
Area Representative Agreement
Less common in the industry, area representative franchise agreements (ARA) grant the right to market, recruit, and support third-party franchisees in a specified territory. Area representatives, although capable of separately owning franchise units, function as a commissioned sales agent and offer defined support to those they recruit within their designated area.
Contrary to master franchising that requires more capital, business experience, and Franchise Disclosure Document (FDD) development, an area representative is not accountable for FDD filing and agreement management. They are only responsible for the recruiting and support of sub-franchisees for the franchisor.
Contrary to master franchising that requires more capital, business experience, and Franchise Disclosure Document (FDD) development, an area representative is not accountable for FDD filing and agreement management. They are only responsible for the recruiting and support of sub-franchisees for the franchisor.
MFA
Master Franchise Agreement
Master franchise agreements (MFA) provide exclusive rights to a large area such as a State, Region, or Country, to operate one or more prototypical units and the right to sub-franchise and support within a defined market. The master franchise corporate unit typically serves as an operational prototype, host discovery meetings, and serves as the training center within the territory.
Master agreements outline the development schedule specifying the minimum number of units to be open annually, division of labor, and the sharing of franchise, royalty, marketing, and rebate fees. Often a 50/50 partnership, the franchisor may require a larger share of the fees if responsibilities and respective cost require more extensive involvement.
Master agreements outline the development schedule specifying the minimum number of units to be open annually, division of labor, and the sharing of franchise, royalty, marketing, and rebate fees. Often a 50/50 partnership, the franchisor may require a larger share of the fees if responsibilities and respective cost require more extensive involvement.