Simply put, master franchising refers to a franchise that is managed by an investor – or ‘master franchisee’ – who has paid a large fee to the franchisor initially in order to secure the business development rights of the brand in a specific region.
Upon becoming a master franchisee in charge of a master franchise, the investor is then responsible for all the franchise recruitment in their area, as well as the ongoing training and support of any franchise units in their region.
Most (if not all) of the initial fees franchisees pay are retained by the master franchisor, as are the royalties they will pay in time.
Essentially, a master franchisor is a micro-franchisor, reaping the rewards of the franchise in a specific territory, in exchange for bearing the responsibility for managing that territory.
Why choose master franchising?
With the ability to gain master franchisee rights to any area, from entire countries to individual cities, many franchisors choose this approach as they believe it will facilitate rapid business growth while incurring less risk to their capital.
For example, if you’re a business owner and intend to expand into a specific country, you might employ a master franchisee as the manager of your planned expansion. They would be responsible for launching a specific number of new franchises in a stated time period, allowing you to reach your goals while delegating the bulk of the work and the responsibility.
Regardless of what type of franchise business being master franchised, from retail franchises to property franchises, hard work and commitment are two of the key factors in making any franchise successful.
How do master franchising agreements work?
Traditional franchise agreements legally outline how the franchisor-franchisee dynamic works regarding each party’s obligations and rights. A master franchisor agreement is more complex due to the need to cover three parties – the master franchisor (business owner), the master franchisee (franchisee in charge of a region) and the sub-franchisees (franchisees within the master franchisee’s region).
It’s a legal agreement detailing fees that must be paid to the master franchisor, as well as the master franchise royalties which will be paid by sub-franchisees. The specific profit percentage earned by all parties varies depending on the franchise.
Essentially, a master franchise agreement includes most (if not all) of the conditions included in a standard franchise agreement, plus a lot more to cover the greater complexities at work within a master franchise.
This complexity is, in part, due to the fact such agreements generally last from ten to twenty years, and need to specify contingencies for various circumstances that could potentially arise during that time.
Practically speaking, it might not be possible for the master franchisor to take over running the franchise if it’s based in another country. Decisions will also need to be made regarding which country’s laws apply to the agreement, as they are frequently signed in one country, but apply in multiple countries.
Advantages of master franchising
Generally speaking, master franchising is highly beneficial for all sides of the agreement.
The franchisor themselves gain a large cash injection from selling the master franchise, and are able to grow and expand into another region or city without having a physical presence or extensive knowledge of the area, its economic environment, or even language.
Meanwhile, the master franchisee is able to reap the rewards of a reputable and recognisable brand name, in addition to the support and expertise of the franchisor. They will generally also receive a share of ongoing fees and fees coming from any franchises inside their territory, which can be anything from 40% to 75% of the total fees franchisees pay in the area. Pretty much all franchises can be master franchised.
Disadvantages of master franchises
While there are many great benefits to operating a master franchise, there are, of course, downsides as well.
The franchisor will, ultimately, have less control over their master franchisee’s region. Transferring responsibility in this manner has the potential to dilute their brand’s standards, so it’s important to monitor and control it as tightly as possible. Key to any master franchising venture is the appointment of the right master franchisee.
There are also downsides for the master franchisee, who is handed a difficult role with many of the responsibilities of a franchisor, such as recruiting franchisees, and supporting them as they build their own businesses.
It’s important to carefully weigh the pros and cons of master franchising prior to committing to the model.
Is master franchising right for you?
It’s easy to think that with enough ambition, enthusiasm, and entrepreneurial spirit, running a business that comes with a proven brand and business model is more than enough to qualify you for the role of master franchisor. But, before you make that leap, there are a couple of other points to consider.
Firstly, you will need to have complete confidence that your franchisor is offering a robust plan for international development, fully supported by a proven, comprehensive business plan. Even if you are certain they’ve done adequate research into the viability of the venture, you should substantiate their data with research of your own.
Prepare your own business plan to ensure the investment you’re making is solid, and investigate the franchisor themselves, as well as their business history. If available, as to see their Franchise Disclosure Document, including all financial elements.
Finally, trust your instincts. If anything seems ‘off’ about the agreement, keep digging until your fears are allayed and, if they are not, walk away before entering into any agreements.