A franchise is an agreement in which a firm (franchisor) enters into a contract with other businesses (franchisees), granting them the authorization to operate in the distribution of goods and services, under the franchisor's trade name and guidance, in exchange for a fee. The franchisor has a method of doing business, including knowledge, experience, logos, secret formulae, trade secrets, business styles, and house marks, which will be licensed to the franchisee.
The franchisee can purchase the right to either a single-unit franchise or a multi-unit franchise.
A single-unit franchise is an agreement where the franchisor grants the franchisee the rights to operate one franchise unit. This is the simplest and most common type of franchise.
A multi-unit franchise is an agreement where the franchisor grants the franchisee the right to operate multiple units. This can be either an area development franchise or a master franchise. If granted the rights to an area development franchise, the franchisee can operate multiple units during a specific period of time, within a specific territory.
A master franchise agreement is similar to the area development franchise, with the additional right to sell franchises to other franchisees within the territory, known as sub-franchises. In this way the master franchisee takes over the role of the franchisor, and providing support and training to the new franchisees, and receiving fees and royalties for their duties.