Marshall Reddy has been helping entrepreneurs get into franchises for decades. He considers it his mission to help people reach their goals through business ownership. Part of the process is educating potential franchisees on the ways they can access an opportunity. There may be more options than you realize.
Reddy says there are four ways someone can buy into a franchise. The most common model is the single-unit franchise. There’s a reason most buyers choose this model; the entry cost is relatively low, and many new owners feel more comfortable starting with a single unit until they become confident that they can run the business and meet their goals.
This lower risk model is a great starting place, but its potential income for an owner is limited. And most single-unit franchises don’t provide enough income for two or more partners. Usually, the single unit franchisee is for a relatively new entrepreneur who wants to replace his traditional job with self-employment income.
At the other end of the risk/reward spectrum is the area license, or master franchise license. This is increasingly rare among established franchisors; usually, you’ll find the model being offered by younger franchisees who are seeking quick growth. The area franchise model usually offers a large territory for development: a large metropolitan area, a few counties, or a whole state or region. The area license holder is charged with finding franchisees and helping them establish their business. Some franchisors may require the area license holder to own at least one unit in the territory to use as a flagship business and training center.
The area license holder splits the franchise fees with the franchisor and collects royalties from the new units. The area license holder must have a plan for developing the territory within a specific timeframe in agreement with the franchisor. This can be a very profitable model, but it requires a broad spectrum of business knowledge on the part of the owner. Most of the success stories in this model include partnerships with diverse expertise. One partner may handle operations support, one might do marketing, and another handle real estate.
This model takes experience and expertise, but it’s a very profitable model as long as the franchisees achieve success. The master license owner(s) invest their time in recruiting, vetting, training, and supporting other business owners.
Entrepreneurs who choose this model are by definition less risk-averse than single-unit franchisees, and they may change the dynamics of the territory. Reddy has seen a few cases where a new franchisee wanted to put a toe in the water with a single unit, only to find that a more confident investor has seen their success and purchased a master license. The single unit owner suddenly becomes limited to the single unit whether or not that was their long-term plan.
Some business owners become franchisees after they start their business and achieve success under their own brand. They may come, over time, to see advantages in aligning themselves with a national franchise brand. Two of the most common industries for the conversion model are real estate and hair salons. A moderately successful hairstylist will gain considerable benefit from becoming part of a national brand’s franchise territory.
Conversion fees are generally lower than traditional franchise fees, but the owner will also have to bear the cost of conversion. They may have to invest in technology, bring facilities up to franchise standards, and pay for brand conversion items such as signage. The converted business gains much in brand recognition, national marketing, and systems, so this is an attractive model for an entrepreneur who wants to take their business to the next level.
Finally, the fourth model is the one Reddy recommends for entrepreneurs who are confident they can manage a larger operation and have higher income goals. The multiple unit model has several advantages. Franchisors usually offer a discount on the franchise fees after the first purchase, so the cost of entry for the extra units is lower. The potential for income, however, increases with each unit, and the owner also realizes cost savings by scaling support and marketing services for multiple units.
Because there are several ways to enter and succeed within a franchise model, Reddy recommends entrepreneurs find a consultant who can help them determine what will work best for them. They may have more options and more opportunities than they realize.