For both franchisors looking to expand and serious investors looking to take the next step in the franchise business, master franchising is a common and convenient option.
You’ve probably heard the term tossed around before, but what exactly does it mean and what are the basics you need to know about a master franchise contract?
Here’s a snapshot of what you’re getting into:
Master franchising is a type of franchising agreement that typically involves a business looking to rapidly expand, oftentimes in an unfamiliar territory. This territory could be something as simple as expanding into the West coast of the United States when your company is primarily East-coast based, or as complex as opening several new branches of your company into another country.
The parent company, called the “master franchisor,” strikes a deal with a main investor, a company, or a group of investors. In the latter two cases, a designated person becomes the “master franchisee.” The master franchisee then becomes the main contractor who opens units in the expansion territory, and also has the ability to find other sub-contractors or franchisees to open chains.
Essentially, the master franchisee is acting on behalf of the parent company in a given location.
There are a few main steps to master franchising.
First, a Master Franchise Agreement (MFA) is drafted and agreed upon. This typically contains most of the regular details that a franchisee would sign, with a few additions, including different payments and territories.
Most often in a MFA, the master franchisee is granted rights to a defined territory in which he or she can open units of the parent company. This territory can be as small as a neighborhood or metropolitan area, or as large as an entire country. Additionally, the master franchisee usually gets exclusive expansion rights in that area, meaning no one else from the same company is going to create competition for his or her units.
On top of that, the finances are a bit different. Because the master franchisee is opening so many units, they’ll frequently receive major discounts on the franchise fees, or have them waved altogether save for an initial fee that might be larger than a regular franchisee fee. For every unit opened thereafter, the master franchisee receives a percentage of the franchise fee paid to the parent company, and a cut of the royalties and other fees.
While the company is sacrificing a percentage of money, it gains the convenience of having someone else open several units that it will make money from. Plus, allowing franchisees to open locations that are not company owned means the parent company mostly eliminates money needed to finance new branches.
Usually, there is a development schedule that outlines how often a new franchise must be opened, and how many new units as well. Schedules vary, but having a new location open every six months within the given territory is a common example.
In addition to the money saved and the convenience mentioned above, companies expanding into unfamiliar territories get the comfort of knowing their master franchisee is more in touch with the region in which they are expanding.
For example, in another country especially, cultural differences, market adjustments and interests, and different laws and regulations make a company’s task of expansion much more difficult. But by handing the reigns over to a master franchisee or a master investment firm, the master franchisors are assured that someone ingrained in the culture and differences is in charge and will make the entire process simpler.