What is master franchising?
Your average franchise system typically consists of a single franchisor in a franchise agreement with one or more franchisees. At that point the franchisors business has been successfully developed in order to expand their model. The franchisor provides the franchisee with support, training and all the business material to launch the brand with their best foot forward. In return the franchisee pays an initial franchise fee and ongoing royalties to the franchisor for legal use of the brand, development, training and support.
Master franchising goes one step further. Rather than the franchisor directly recruiting the franchisee, a master franchise agreement involves a third party to act as the intermediary in a new territory. The master franchisee (or sub-franchisor) bares the responsibility to recruit sub-franchisees in their designated state or territory. In other words, the master franchisee buys company rights off the King (the head franchisor) and becomes the Chieftain/Earl (master franchisee) in the new land. They still have to obey the Kings laws and pay their dues (fees) to the King – but they are now the ruler of their own lands – collecting their own taxes (fees) from business owners who they have helped set up in their land.
Master franchisees have to source their own franchisees, using their local contacts and knowledge. It can be lucrative for a master franchisee, as they will be paid part of the initial franchise fee and ongoing royalties from the franchisee for their efforts. Exactly how much, of course, depends on the franchise agreement terms. As a master franchisee, you take on all the responsibilities to train, develop and support your sub-franchisees in your jurisdiction. Often, master franchisees don’t start their own franchise in their own territories. Rather, they spend their time developing and maintaining their franchisees – while trying to further grow the business.
How to become a master franchisee?
To become the master franchisee of a new state or territory, a master franchise fee must be paid to head franchise in accordance with the terms of their master franchise agreement. Make sure you have done thorough market research in terms of the business and the location. Also, a detailed business proposal will usually be required during the process.
In terms of the right person for the job, a master franchisee is usually a business leader with exceptional management skills. They should have an entrepreneurial outlook and enthusiasm for the brand. Businesses are on the lookout for someone who knows their territory well. This competitive advantage is one of the main reasons companies turn to a master franchising over a direct franchising system.
Advantages of master franchising
For the franchisor
- Increase in revenue: A cash flow boost to the franchisor from the sale of a master franchise agreement and ongoing fees.
- Quick to scale: Allows the business to expand quickly in another country. Often agreements mean that master franchisees have to develop several units within a certain amount of time.
- Saving on time and money: Franchisors don’t have to pour extensive resources in the market development and research of a new state/territory (i.e. cultural, language, and legal barriers).
- Overall brand growth and recognition: International development can increase your overall customer base and brand value.
For the master franchisee
- Proven business model: The company has a track record of success and a developmental plan to grow the franchise network. Immediately inheriting brand equity.
- Exclusive territory: You don’t have the hassle of competition, which opens endless possibilities for expansion.
- Back-up support from franchisor: Direct liaison with the franchisor.
Disadvantages of master franchising
For the franchisor
- Loss of potential income: The franchisor must concede a large percentage of the initial and on-going fees to the master franchisee. However, the initial master franchise fee helps negate the losses.
- Franchisor has less control over the franchise: The master franchisee assumes the majority of power in their territory. But don’t worry, a good master franchise agreement means they can’t go rogue.
- Potential damage to the company reputation: Issues out of your control can have a knock-on effect to the worldwide network.
For the master franchisee
- Potential to fail in an untested market: Risks are inherent in new businesses. Be sure to do your market research before entering into any agreement.
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