The pros and cons of being a master franchisee

01/07/2018 14:00 | Start a business

The pros and cons of being a master franchisee

Master franchising is used extensively by larger, established franchises. When implemented intelligently, it’s an extremely effective means of facilitating franchise expansion and opening up new markets. However, when pursued in the wrong way, master franchising can have severe drawbacks and cause unnecessary complications. Here, we take a look at three of the most important advantages and disadvantages of master franchises.

A brief definition of master franchising

Simply put, a master franchise is an agreement in which one party (the master franchisor) grants another (the master franchisee) control over franchise management and operations in a specific region or territory. This includes the right to appoint sub-franchises or participate in a sub-franchise themselves. In many cases, master franchising is used to establish a franchise in a new country.

Advantages

1. Additional revenue

In many situations, a master franchise is the most sensible and profitable way to add an extra revenue stream to your existing income. This is particularly true when it comes to expanding the franchise without the necessary resources to run new franchise territories. Though the master franchisee will take a substantial cut of the profits, the franchise itself will avoid many of the costs associated with establishing itself in a new country or region. These costs can include substantial legal fees, recruitment, franchisee supervision, and management costs, all of which quickly accumulate and drastically reduce the potential for enormous profits. By establishing a master franchise, a company can add a revenue stream to their operations, while also avoiding a large number of startup costs.

2. Greater local knowledge

One of the key benefits to master franchising is its use of local businesspeople to establish the franchise in new territories. Though the franchise may have a great deal of experience operating in its home market, conditions in other countries are likely to be substantially different. Besides the obvious, such as language and financial infrastructure, there are factors like legal differences, business culture, and consumer culture to consider. To succeed, franchises will need to make use of individuals with a developed understanding of how franchising works in the new territories and what businesses need to do to thrive.

3. Expansion of the franchise network

The franchise business model is specifically designed to facilitate expansion. It’s an effective method for growing a business into new areas and achieving market dominance in the quickest way possible. However, this rapid expansion isn’t always possible without a master franchise agreement. A business may not have the required expertise, experience, or resources to open up units in new territories, but market conditions may dictate that this is the most profitable and beneficial move. For instance, if two businesses of a similar kind are racing to establish themselves as the leading company in their industry, momentarily pausing the expansion push may result in the competitor establishing a foothold in new markets and stealing a significant market share at your expense. Master franchising is one way of expanding the franchise network when it’s not possible under the traditional franchise structure.

Disadvantages

1. Loss of control

All franchisors need to retain control of business operations to ensure that standards are maintained across the franchise network and that the brand’s reputation is not compromised in any way. With master franchising, some loss of control is inevitable. Once a master franchisee has been selected, franchisors need to be aware of the fact that they’ll now have an additional ‘middleman’ between them and the franchisees. This means that they won’t have direct contact with new franchisees and that the flow of information to the

franchisor

won’t necessarily be as complete as it was. Loss of control is particularly relevant to master franchise agreements in new countries. In this context, master franchisors are relying on a single individual to translate texts, interpret rules and regulations, and implement existing procedures in a culturally appropriate way. Consequently, it’s a good idea to put a healthy system of checks and balances in place and select a master franchisee based on your ability to work closely with them and trust them.

2. Lower royalty receipts

As the master franchisor is delegating a more sigrnificant number of tasks and responsibilities to the master franchisee, it's natural that the master franchisee will take a higher cut of the profits. This means that franchises will generate less gross income from the new territories than they would if they established the franchise themselves. However, this is often offset by the cost of setting up the franchise in a new country. While you may take a lower percentage of royalty fees, you don’t have to take on the financial or managerial responsibilities and costs associated with franchise startups. This means franchises have to play a delicate balancing game – is it more beneficial to take a lower cut of the profits but avoid expending valuable time and resources on establishing the franchise in a new territory? Or is it more helpful to invest significant amounts in setting up a new franchise structure now, to generate more substantial profits in the future?

3. Complexity

Finally, the complexity of master franchise agreements can also cause difficulties. Unlike traditional franchise arrangements, the master franchisor and master franchisee are likely to be operating in different financial, legal, and cultural structures. This can result in complex legal arrangements that are open to exploitation, confusion, or misinterpretation. All master franchisors need to be aware of this issue and attempt to simplify the agreement without losing too much of its nuance or rendering it ineffective.

Conclusion

Some of the most profitable franchises in the world have become successful international organisations due to their clever use of master franchising. Employed in the right situation, it’s a powerful weapon in a franchisor’s armoury. However, franchisors need to understand when, how, and why they should implement a master franchise agreement if it's to succeed. While there are numerous advantages to the model, there are also many potential pitfalls. A well-prepared franchisor will be aware of these and attempt to maximise the potential benefits, while also mitigating against the risks.

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