In Short
- Master franchising allows a third party to manage and expand a franchise in a specific territory.
- Master franchisees generate income from operating units, franchise fees, and royalties.
- It requires industry knowledge, franchising experience, and familiarity with the territory.
Tips for Businesses
Ensure your master franchisee has a deep understanding of your industry and territory. Clearly define responsibilities and revenue sharing in the agreement. Assess both the opportunities for growth and the challenges of giving up control before proceeding.
Table of Contents
Master franchising is a type of franchise expansion often used by international franchisors. A master franchise agreement sees a franchisor and a master franchisee come together to allow the master franchisee to take over a particular region for franchise development. In effect, the master franchisee serves as the franchisor for their specific region. This article will take you through five essential facts about master franchises.
What is Master Franchising?
Master franchising allows a third party to enter a master franchise arrangement with the franchisor. Under this arrangement, the master franchisee is responsible for recruiting and training franchisees and growing the franchise network in the territory. However, the master franchisee remains bound by the franchisor’s brand guidelines, systems and processes.
Franchisors use the master franchise method to expand into a specific territory, which the franchisee does not intend to enter directly. The arrangement is beneficial for both parties since:
- master franchisee candidates frequently have sales and marketing experience and an understanding of the industry and the territory; and
- the franchisor has a product and brand that are desirable in the territory.
As a result, the master franchisee buys a proven system and known brand and the franchisor benefits from the master franchisee’s existing business, contacts and expertise.
1. What Does a Master Franchisee Do?
A master franchisee is responsible for recruiting and training franchisees and growing the franchise network in the territory. Sometimes, a master franchisee might be accountable for one or more countries. Essentially, a master franchisee serves as a franchisor for their region and is responsible for developing the franchise network in the new market.
The master franchisee is the one who enters into franchise agreements with prospective franchisees in the territory. The master franchisee must also provide their franchisees with training and support. This includes:
- initial and ongoing training;
- ongoing support;
- marketing tools and materials; and
- an effective business model and established business operations.
2. What Are the Master Franchisee’s Revenue Streams?
Master franchise agreements provide multiple revenue streams for the master franchisee. Let us explore a few of these below.
Company Site
The master franchisee usually owns and operates at least one franchise unit within their region. This will often serve as the flagship store in the area and is used as an example to encourage prospective franchisees to join the network.
Franchise Fees
In most cases, the master franchisee will share the initial franchise fees received from new franchisees in their region with the franchisor.
Royalties
The master franchisee shares the ongoing royalty fees they receive from franchisees within their area with the franchisor. This is where most of the master franchisee’s income will come from.
3. What are the Advantages of Master Franchising?
There are several benefits of master franchising for both the franchisor and the master franchisee. First, a master franchisee helps provide development in the territory where the franchisor may not have been able to themselves. On the other hand, the master franchisee benefits financially from this arrangement.
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
4. Disadvantages of Master Franchising
Like any business model, there are disadvantages to master franchising. One of the main disadvantages for the franchisor is that they are giving up control (and income) over a large portion of their franchise network by appointing a master franchisee.
For the master franchisee, the main disadvantage is the responsibilities that the role entails. As outlined above, the master franchisee takes on many of the duties associated with being a franchisor. This includes recruiting and training new franchisees and overseeing their performance over time. You should carefully consider these responsibilities before pursuing a master franchise agreement.
5. What Makes a Good Master Franchisee?
Master franchising is complex. It requires a specific type of person to succeed in this role. Some of the critical traits of a good master franchisee include the following.
Industry Knowledge
The master franchisee should have in-depth knowledge of the franchise’s industry to effectively oversee the supply chain and business operations.
Franchising Experience
The master franchisee will work closely with the franchisor and franchisees. This requires them to have significant experience with the franchising business model. Often, this will come from having experience as a franchisee.
Familiarity With Their Territory
Understanding the market is critical to business success. This means the master franchisee should have a deep understanding of the territory they control. This includes the regions:
- customs;
- laws; and
- cultures.
Be Business Minded
The master franchisee effectively works as a franchisor within their designated area. This means they should have the same traits as a good franchisor, including effective communication and leadership skills.
Key Takeaways
Franchisors use the master franchise method to expand in a specific territory. If you are a franchisor, you might be considering master franchising. Some of the key things to know about master franchising include:
- what master franchising is;
- the role of master franchisees;
- the revenue streams of master franchisees;
- the advantages and disadvantages of master franchising; and
- what makes a good master franchisee.
If you need assistance deciding if master franchising is for you, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
Typically, a master franchise agreement can last for as long as the parties agree. Depending on the parties and territory, they can even last up to 20 years. They are usually renewable, contingent on meeting performance standards and development schedules.
Franchisors should include audit and inspection rights, training requirements, sub-franchise compliance, and clauses for default, termination, and taking over operations if standards decline.
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