Types of Franchise Structures (Part A)

When starting a franchise in New York, it is important to know that you can structure your franchise in several different ways. Two common types of franchise relationships are individual or "unit" franchises, and area franchises. If you need help understanding the difference between these two types of franchise structures, as well as help deciding which is the best for you to choose, you can get the professional advice of a New York franchise lawyer.

Unit franchises

An individual, or unit franchise is one in which a franchisor grants a franchisee the right to develop and operate one franchise at a specific location within a specific territory. Once you have acquired a unit franchise, you may be granted the rights to acquire additional franchises, subject to performance criteria, and structured either as options or rights of first refusal.

A unit franchise may also be offered as an incentive for growth, with additional franchise rights granted to successful franchisees. However, most franchisors simply adopt company-wide policies regarding their incentive programs.

Generally, service businesses will structure a franchise as a unit franchise. This is because a service business generally requires the presence of an owner-operator, and for which the expertise of the franchisee is critical to the success of the operation. Examples of service businesses that are franchised on a unit-by-unit basis include those in the foodservice, lodging, home inspection and automotive service industries.

Area franchises

Oftentimes, unit franchises can be sold in bundles under a multiple unit development plan. This type of plan grants a single franchisee the right to develop a number of franchised businesses, usually within a specific territory. In this case, each franchise will be governed by a separate franchise agreement.

In the case of an area franchise, you will use a multiple outlet franchise agreement, or an area development agreement. Under these arrangements, a franchisee may be granted the right to develop two or more outlets within a defined territory. This is ordinarily under a master agreement called an "Area Development" or "Multiple Unit Development Rights Agreement". These agreements anticipate the issuance of separate unit franchise agreements for each separate location.

If you are starting a franchise in New York, and you would like to own more than one location, you may consider negotiating an area development agreement. Your New York franchise lawyer can help you negotiate such an agreement, if the company allows this type of agreement. You will first need to learn which options are available for your franchise in New York.

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