Is A Master Franchise The King Of Opportunities?

When a franchise is ready to expand into new international markets, there are a few different ways they can consider doing so. One of the most popular options is master franchising. For individuals looking to manage and grow a business over a large area, master franchises can be the perfect investment and a shortcut to success. International franchise opportunities are difficult to come by, and it’s not often that you’ll get the chance to take control of a successful business to oversee its efforts at expansion. Here, we take a look at whether master franchising is as ideal an investment opportunity as it sounds.

What is master franchising?

Master franchising is a term used to describe the process by which a franchisor hands over the rights to operate the franchise in a specific territory. The individual or organisation they sell the rights to is known as the master franchisee. They are then responsible for running the franchise in that particular territory and will take a large percentage of the profits – though they’ll typically pay a substantial master franchise fee to do so.

Master franchising has historically been a popular way of expanding a franchise internationally. This is mainly because it allows franchises to continue growing and profiting from their expansion, without having to take direct responsibility for franchise units in the new territory. It’s an incredibly common means of expansion for fast food restaurants, computer hardware retailers, and convenience store chains. However, this particular franchise model can be adapted to a variety of business types and is a versatile way of opening up new markets.

Why do businesses choose master franchising?

There are numerous reasons why businesses consider arranging a master franchising agreement if they’re looking to expand overseas. These include;

• Lack of expertise – starting a business in a new country requires an in-depth knowledge of its markets, language and business culture. Business owners cannot expect to imitate their home market strategy and succeed. Master franchising mitigates against this lack of expertise by bringing in a master franchisee who does understand the market.
   
• Financial limitations – a franchise may desire international expansion and have the funds to establish a master franchise arrangement but lack the capital to achieve their aims through a wholly owned subsidiary.
   
• Additional revenue stream – expanding into a new territory by setting up a subsidiary organisation may not provide sufficiently profitable to justify the investment and use of resources. Instead, a master franchise agreement adds a revenue stream – in the form of master franchise fees and perhaps a percentage of revenue – without having to dedicate significant amounts of time, money, and effort to the new units.

Usually, businesses choose to expand via master franchises because it's perceived to be in their best interest to do. As a master-franchisee, it's essential that you're getting as good a deal as possible and will be suitably rewarded for doing the hard work of expanding the franchise in the new territory.

Advantages and disadvantages

As with any business model, there are both advantages and disadvantages to master franchising. Executed in the right way, under the right circumstances, master franchising can be a golden opportunity, providing individuals with their own ready-built brand for rolling out across an entire territory. Get it wrong, and master franchising can result in a complicated and convoluted organisation structure that’s inefficient and unlikely ever to succeed.

One of the key benefits of the system for master franchisees is the potential for high-profit margins once the initial setup period is over. As the master franchisee brings in more and more sub-franchisees, their ability to turn a substantial profit increases and their access to economies of scale grow. Master franchisees only have to manage and support those sub-franchisees in their territory and can often do so from a small office space or even from home. Finally, master franchisees know that they’re getting a tried and tested product/brand that’s already been successful in markets around the world. This minimises the risk on their investment and ensures they can focus entirely on expanding the franchise.

On the other hand, master franchising arrangements can cause problems if they’re not utilised in the right context. One of the critical problems master franchisees can face is poorly defined contractual arrangements. If every aspect of the master franchisor/franchisee relationship is not explicitly defined, there's great potential for confusion, legal dispute, and long-term problems. Similarly, if master franchisors do not provide the required support to their franchisee, growth in the new territory can stumble.

Finally, master franchisees can sometimes struggle to balance the dual aspect of their role. On the one hand, they’re the franchisor responsible for managing the sub-franchisees in their territory. On the other hand, they’re a franchisee themselves and often subject to the results of decisions made higher up in the franchise hierarchy. This can be a tricky position to be in and requires an individual who understands the master franchise model, who is comfortable with their franchisor, and who has a clear idea of how they’re going to grow the business.

Alternatives to master franchising

Master franchising can be a golden opportunity for individuals looking to jump into a business that’s already established itself and is looking to grow. In many circumstances, it will be the best option for both the franchisor and franchisee. However, there are some situations in which alternative models may prove more profitable. These models include;

• Area development agreements – area development agreements are similar to master franchises but differ in several ways. Typically, an area development agreement will result in a franchise appointing an area developer. They are then responsible for opening (or facilitating the opening of) a certain number of stores in their defined territory. Unlike master franchise agreements, the area developer does not replace the franchisor and cannot sell or profit from their own unit franchise or area development agreements.
   
• Joint venture agreements – joint ventures are often based on hybrid models in which aspects of master franchising are combined with other business arrangements to facilitate international growth. They can take many forms and are an incredibly versatile means of bringing together the various factors (capital, local expertise, an established brand etc.) required to propel a business into new markets.

Conclusion

At the right time, with the right franchisor, master franchising can be the king of opportunities. This is particularly true for individuals looking to invest in a business that’s already demonstrated it’s capable of success. However, it’s not a one-size-fits-all solution. Master franchising is only a good idea if it’s applied in the right context. Potential master franchisees need to ensure their agreement with the franchisor is just, profitable and provides the required support and protection. They need to recognise that new markets present new challenges. Finally, they need to ensure that the contractual and legalistic specifics are set in stone and that they’re happy with the deal they’re getting. If all of these factors come together, a master franchise could be the best investment you’ll ever make.