What Is a Single-Unit Franchise?
Definition and Examples of a Single-Unit Franchise
A single-unit franchise is one in which the franchisor grants the franchisee the right to operate just one location. The franchisee can use the franchisor’s trade name, service marks, and operating system when conducting business at that location. This is the most common type of franchise.
The relationship is directly between the franchisor and a franchisee. There's usually no middle man, such as a hired manager. The franchisee will generally—but not always—be the operator of the location.
What Is a Single-Unit Franchise?
A single-unit franchise is often referred to as “mom-and-pop” franchising. First used in Europe by brewers for the sale of their beers at local taverns, it's likely the oldest form of commercial franchising. Even Benjamin Franklin used it in British Colonial days in the establishment of printing stores.
- Alternate name: Mom-and-pop franchising
How a Single-Unit Franchise Works
The franchisor grants the right to open and operate just a single unit in this type of franchise, and the franchisee is usually hands-on, managing the franchise location personally.
The franchisee isn't always the manager of the business in a single-unit franchise, however. Some franchisees will keep their existing jobs, and some franchisors expect this and advertise their franchise offerings as a manager-run franchises.
Single-Unit vs. Multi-Unit Franchising
Single-unit franchising is different from multi-unit franchising, where it's expected that, by necessity, multiple locations will be managed by hired staff because one franchisee/individual can't be everywhere.
Growing a franchise system on a per-unit basis via single-unit franchising is generally slower and more cash-intensive for franchisors than multi-unit franchising. Although the cost of acquiring a multi-unit franchisee is more expensive overall than taking on a single franchise location, the cost of acquisition is spread over a greater number of locations for a multi-unit developer.
The franchisor has to support each location separately with single-unit franchises. The franchisor deals with a single franchisee for several locations in multi-unit structures. The franchisor generally supports the franchisee through the franchisee's general manager, someone who oversees the multiple locations.
This advantages in cost of acquisition and support are why franchisors are more focused on multi-unit developers than on single-unit franchisees.
Franchisors also tend to look for multi-unit developers because these individuals are generally more sophisticated in business. They're also frequently better capitalized than single-unit operators. Multi-unit franchisees are generally represented by legal counsel to assist them in conducting their due diligence on the franchisor.
Multi-unit franchisees are less likely to seek third-party forums to settle their disputes and are more willing and able to take risks as the business and market changes.
Some franchisors, such as McDonald’s, don't offer multi-unit franchise development agreements. Instead, they allow franchisees to earn the right to acquire multiple locations, each under separate single-unit franchise agreements.
|Single-Unit Franchises||Multi-Unit Franchises|
|Franchisee is normally the manager||Each location might have a hired manager|
|Is generally a slower process and more cash-intensive to establish||The cost can be spread over multiple locations|
|Franchisor must support each location separately||Franchisor supports one general manager who oversees multiple locations|
What's in It for the Franchisor?
Single-unit franchisees tend to be highly motivated. These franchisees often mortgage their homes, use the proceeds from their 401ks, or take out and personally guarantee loans to fund the acquisition. The initial franchise fee can run anywhere from $10,000 to several hundred thousand dollars, depending on the franchise, and there are usually continuing royalty payments as well.
The revenue earned from the business is generally a single-unit franchisee's sole income. This motivates them to operate their businesses with a focus that's often missing from the hired management of multi-unit franchisees.
Requirements for Single-Unit Franchises
The franchisor should provide a franchise offering and a franchise agreement. It's almost universally recommended that a franchisee seek professional advisors to review these documents. The Federal Trade Commission (FTC) requires that franchisors include a precise statement on the first page of their franchise disclosure document:
“The terms of your contract will govern your franchise relationship. Don’t rely on the disclosure alone to understand your contract. Read all of your contract carefully. Show your contract and this disclosure document to an advisor, like a lawyer or an accountant."
Franchisees nonetheless often admit that not only did they not have a qualified lawyer working with them when they acquired their franchises, but some of them didn't even bother to read the agreement.
Franchise agreements are lengthy and complex. They're typically a standard form of contract provided to all franchisees. They're adhesion contracts for the most part that franchisors won't materially negotiate.
Franchisees often believe that franchisors use some standard agreement and that all franchise agreements, regardless of the franchisor, are the same, but this is not the case.
The Franchise Agreement
The purpose of a franchise agreement is to detail the rights and obligations of both the franchisor and franchisee over an extended period of time. It fully defines the relationship and ensures that the franchisee will agree to operate their business to the franchisor’s standards. It states that the franchisor will provide the support specified in the agreement.
The agreement will dictate terms for using the franchisor's trademark, where the unit can nor cannot be located, the duration of the agreement, and whether it can be renewed at the end of that time. It also sets quality standards.
While the negotiated changes a franchisor will make for a single-unit franchisee will generally be limited, multi-unit franchisees may be able to secure additional modifications.
- A single-unit franchise is an agreement that allows a franchisee to open and operate just a single location.
- Single-unit franchises are typically managed and run by the franchisee rather than by hired staff.
- They can be more financially prohibitive to set up because the costs can’t be divided up and spread out over multiple locations.
- The franchise agreement typically dictates where the franchisee can locate their unit, and it will set numerous other terms as well.