Master franchising. This is a form of franchising that’s as grand as it sounds, but what is a master franchise? It’s basically an arrangement in which the master franchisor (the brand name owner) gives permissions and responsibilities of their brand to a master franchisee within a given geographical area. So, to all intents and purposes, the master franchisee performs the role of a mini-franchisor in their particular territory.
Why master franchising?
Master franchising is often used by larger franchises for international growth. Master franchise rights can apply to just a single city or a whole country. So, if an established UK based franchise wanted to expand into another country, they could consider recruiting a master franchisee in that chosen country. This person becomes the master franchisee in that territory and effectively becomes a franchisor who will sell units and build the franchise within their area. In general, the master franchisee will have an obligation to open a certain number of sub-franchises within a particular period, which will be determined in a franchise development schedule.
As with traditional franchising, a franchise agreement outlines in legal terms how the franchisor / franchisee relationship works with respect to rights and obligations. The master franchise agreement is more complex though as it involves three participants – the master franchisor, the master franchisee and the franchisees. This legal contract will detail the franchise fee that needs to be paid to the master franchisor and the ongoing master franchise royalties that must be paid by the sub franchisees. Depending on the nature of master relationship you have entered, the percentage of profit is shared.
Master franchise agreements include many of the conditions that are present in a standard franchise agreement. However, the contracts tend to be more lengthy and complicated, primarily because the term of the agreement tends to be between 10 and 20 years. There are also several issues that need to be considered when drawing up a master franchise agreement. Like, what happens when things go wrong? From a practical perspective, a master franchisor may not be able to take over the running of the franchise as they could be based in a different country. A decision also needs to be made on what laws/courts applies to the agreement – the agreements are usually signed in one country, but apply to an overseas franchise. The most effective way to overcome these challenges is to consult local specialist franchise advisors.
As a rule, master franchising is advantageous for both parties:
- The master franchisor’s benefits are two-fold. Firstly, they gain financially with a large injection of cash from the sale of the master franchise. Secondly, they have been able to expand into another city or country without the need to have an extensive knowledge of the new territory, the economic environment, or even deal with language barriers if they exist. This level of awareness is what the master franchisee will bring to the party.
- The master franchisee also benefits from use of the brand name as well as the usual support that a franchisee would receive from a franchisor. From a financial perspective, the master franchisee usually has a share of the ongoing royalties and franchise fees from locations within their territory. This can be anywhere from 40% up to 75% of all fees paid by franchisees in that region.
Of course, there are some drawbacks to the master franchising model too:
- The master franchisor ultimately has less control over the franchise system rising from the transfer of responsibility. This has the potential to dilute brand standards and so needs to be tightly controlled and monitored. This is why the selection of the master franchisee is key to the success of the franchise.
- The role of master franchisee is a difficult one. You’ll have to take on many of the responsibilities associated with being a franchisor, like recruiting other franchisees within your designated territory and supporting them to build their businesses. However, as a franchisee, you’ll be taking on these additional duties while running your own operation which will probably be viewed as the pioneer for the brand in your area.
So, there are advantages and disadvantages of being a master franchisee which should be weighed up before committing to this model. But it can a tempting option when, in some cases, the master franchise fee for an entire country can be less than the cost of buying a single unit franchise. If you’re attracted by the possibility of becoming a master franchisee, then why should you give this option some serious thought?
The master franchise profile
Well, if you’ve got heaps of ambition and entrepreneurial spirit, but appreciate the idea of running a business with a proven system with established support structure, then master franchising can offer much more potential than choosing to run a single franchised outlet. However, it’s important to proceed with caution and there’s some things you should consider before becoming a master franchisee.
You need to be confident that the master franchisor can demonstrate that they have a robust international development programme which is supported by a comprehensive business plan. Are you happy that the master franchisor has completed market research? How certain are they that their product or service will be well received in the target country? If the master franchisor hasn’t done the homework, what makes them think a franchised network can succeed in another country?
Even if the master franchisor has completed adequate research, you need to substantiate the findings with your own investigations. Prepare a business plan so you know that you’re making a sound investment. And before you do invest, you’ll also want to know more about the franchisor’s background. If it’s available, ask to see the Franchise Disclosure Document as this will provide you with all the necessary information about the master franchise, including the financials. Finally, when you discuss the opportunity with the master franchisor, if it doesn’t seem right, then consider carefully if going into business with them is the best decision.