Originally posted on 07/09/2017. Updated on 13/03/2019.
A master franchise is one managed by a master franchisee – an investor who pays the franchisor a large initial fee to secure the rights to develop the business under the brand name in a specified region. The master franchisee is then responsible for recruiting franchisees in that area and providing training and additional ongoing support. They can then keep most or all of the initial fees and royalties paid by their franchisees over time. In essence, the master franchisee can be regarded as a mini-franchisor, managing and benefitting from franchisees in a particular territory.
Why master franchising?
Franchisors choose the master franchisee approach in the belief that it will facilitate more rapid business growth with less capital risk. Master franchisee rights can apply to any area from a single city to an entire country, so business owners with an intention to expand into a specific country could employ a master franchisee to manage this expansion. The master franchisee must launch a certain number of new franchises within a given period, as specified in their franchise agreement.
In traditional franchising, a franchise agreement outlines in legal terms how the franchisor-franchisee relationship will work with respect to rights and obligations. However, the master franchise agreement is more complex, as it involves three participants: the master franchisor, the master franchisee and the sub-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 to the master franchisee. The percentage of profit earned by each party depends on the particular franchise agreement and varies from franchise to franchise.
While master franchise agreements include many of the conditions that are present in a standard franchise agreement, they are far more lengthy and complex. This is partly down to the fact that the agreement usually lasts between 10 and 20 years. Also, the agreement needs to specify what will happen in the eventuality of certain circumstances; i.e. what will happen if things go wrong?
From a practical perspective, a master franchisor may not be able to take over the running of the franchise if they are based in a different country. Because agreements are usually signed in one country but apply to an overseas franchise, a decision also needs to be made on which country’s laws apply to the agreement. The most effective way to overcome these challenges is to consult local specialist franchise advisors.
Advantages of Master Franchises
As a rule, master franchising is advantageous for both parties.
The franchisor firstly gains a large injection of cash from the sale of the master franchise and, secondly, is able to expand their business into another city or country without extensive knowledge of the new territory, the economic environment or local language.
The master franchisee benefits from use of the recognisable and reputable brand name, as well as all the usual support that a franchisee would receive from a franchisor. What’s more, the master franchisee usually has a share of the ongoing royalties and fees from franchises within their territory. This can be anywhere from 40 percent to 75 percent of all fees paid by franchisees in that region.
Disadvantages of Master Franchises
Of course, there are some drawbacks to the master franchising model too.
The franchisor ultimately has less control over the franchise after the appointment of a master franchisee. This transfer of responsibility has the potential to dilute brand standards and must be tightly controlled and monitored. This is why the selection of the master franchisee is key to the success of the franchise.
Also, the master franchisee takes on a difficult role because they have to take on many of the responsibilities associated with being a franchisor, like recruiting other franchisees within their designated territory and supporting them to build their businesses.
These advantages and disadvantages should be carefully considered and weighed up before the franchisor commits to the master franchise model. Once advertised, however, a profitable business should have no trouble finding potential master franchisees, as the master franchise system is an attractive concept – the master franchise fee for an entire country is often less than the cost of buying a single franchised unit.
The Master Franchise Profile
It might be tempting to think that heaps of ambition, an entrepreneurial outlook and enthusiasm for running a business under a proven model is enough to ace the master franchise role. However, there are several more things to consider before taking the leap.
You need to be confident that the franchisor has a robust international development programme that is supported by a comprehensive business plan. Are you happy that the franchisor has completed adequate market research? Can you be certain that their product or service will be well-received in the target country? If the franchisor hasn’t done the homework, they have no way of knowing whether a master franchised network will succeed in another country, heightening the chance that master franchisees (and sub-franchisees) will suffer immediate losses.
Even if the master franchisor has undertaken a good amount of research, you should substantiate their findings with your own. Prepare a business plan so that you can be sure that you are making a solid investment. Before you invest, you should also find out more about the franchisor and the history of the business. Ask to see the Franchise Disclosure Document if it is available, as this will provide you with all the necessary information about the master franchise, including the financial elements. Finally, when you discuss the opportunity with the master franchisor, trust your instincts. If it doesn’t seem right, carefully consider whether going into business with them is the best decision.
Once you have done enough research to be sure that you can trust the claims made by your franchisor and you are sure that this is the right step for you, it is time to sign the franchise agreement.
Alice Tuffery, Point Franchise ©