Why would you become a master franchise owner? Where do you promote master franchise opportunities that you have available? How do you check your master franchise agreement covers all the most vital particulars?
If you have questions like these, this article will get you your answers.
But first of all...
What is a Master Franchise?
A master franchisee is a higher level franchisee that oversees all of the franchises of a certain brand within a specified territory. This territory can sometimes be a large city or metropolitan area, but is more often is either a state or county, several states or counties, or an entire country. This will depend on the level of the master franchisee's investment, and the brand franchisor's existing territories or coverage.
Becoming a master franchisee usually involves investing a significant amount of capital. But you are then able to retain most of the franchise fees paid by the franchisees you manage to recruit in your assigned territory.
The advantage of offering master franchise opportunities for the overall brand franchisor is that they generally mean a lower risk in terms of amount of capital and faster growth when expanding.
Why invest in an international franchise brand?
If you're an investor looking to expand your portfolio or considering becoming a franchisee of an international brand, a master franchise-level opportunity is most likely the place to start...
Because you have a larger amount of capital to invest than most potential franchisees, the master franchise model (which rewards your higher level of investment with ongoing franchise fees from your subordinate franchisees) will be the one which gives you greater rewards.
As a brand-level franchisor, master franchises are a brilliant way of expanding your franchise internationally - without the need for the huge amount of capital that such an expansion would usually require.
Because a master franchisee will have their own investment on the line, they'll also be highly motivated to find the best potential franchisees - and to find as many of them as possible. This will mean rapid establishment of your brand within the target market.
Why become a master franchise owner?
The main advantages of becoming a master franchise owner are:
- Franchise fees: master franchise owners generally collect all or the vast majority of the franchise fees of the franchisees in their territory (depending on the exact franchise agreement - see below).
- Independence: as a higher level franchisee you're generally responsible for running your territory as if it were your own franchise business, with only some established rules from your parent brand to follow.
- Proven systems: by becoming a master franchisee you're still able to use the highly effective systems your brand franchisor already has in place.
- Well known brand: you're becoming part of a business which has already spread awareness of its brand.
- Community building: as a final benefit, many hands-on master franchise owners enjoy being able to assist people who wouldn't necessarily be able to go into business for themselves to start their own careers. This is more a fringe benefit than a hard and fast business advantage, but on a personal level, many master franchisees swear by it.
What should you ask an international franchise owner?
If you're considering becoming a master-level franchisee of an international brand, there are several questions that you should seriously consider asking before you proceed:
- Why are they offering this master franchise for sale? Are they purely looking to exploit you to achieve international franchise expansion? This isn't necessarily a bad thing, but it's best to be aware of what everyone is trying to get out of the agreement from the start.
- What level of brand penetration do they have? Is it of a level in your chosen market that warrants the money they're asking for?
- What is their turnover rate? Do a lot of their franchisees or master franchisees regularly leave for greener pastures?
- What have their franchisees got to say about them? This isn't strictly a question for the international franchise owner, but you should seriously consider getting in touch with any of their current franchisees - or even better, franchisees that failed - to see what they have to say about their relationship with the brand.
- Make sure there's a clear conflict resolution procedure laid out in your master franchise agreement (see below). How have they handled any such disagreements in the past?
Master franchising things to consider:
Has the brand franchisor you've just applied to become a franchisee of immediately offered you a master franchise opportunity in your local area?
Be wary. As we've seen above, there are many benefits of being a master franchisee. But there are also greater requirements from you:
- Management skills: eventually you're going to be managing a large number of franchisees, each with their own businesses, demands, and peculiarities. Are your management skills and experience up to the challenge?
- Familiarity with the area: would you count yourself as fully familiar with the local market? Does that hold true if your master franchise territory would be your entire state or country?
- Industry experience: though this is not always required for the operator of a standard franchise, at the master level having some experience in the industry is usually highly beneficial.
- Funding: investing in a higher level franchise is going to cost you more - there are no two ways about it. Plus, have you considered the master franchise marketing costs, the development costs, and any costs associated with systems you might need to design or implement? You need to have the funding in place.
What's in your master franchise agreement?
As an experienced business owner or manager, you'll know that your master franchise agreement should be scrutinised in fine detail when you're planning on purchasing any master franchise for sale.
These are the most common parts of a master franchise agreement. All should be carefully analysed:
The Introduction
This lays out the basis for the rest of the document, including the goals of both parties.
It will generally include:
- The respective responsibilities of the master franchisee and brand franchisor
- A current business statement regarding the franchise system and its history
- How any changes to the current system will be implemented
The Rights
The Rights that are granted to the master franchisee are a key part of the agreement. These usually include:
- The right to use the system
- The right to intellectual property usage
- The right to grant limited rights to sub-franchisees they recruit
- A trademark license
Territory, Timeframe, and Exclusivity
This part of the document should clearly define the actual geographical area that the master franchise agreement covers, along with provisions for future reduction or expansion of this. Stipulations regarding the latter changes are usually based on performance and should be defined clearly.
The level of exclusivity within the territory should also be specified. This is usually total. Whether this exclusivity prevents the brand franchisor from marketing in the area should be clear.
If there is a time limit to the agreement, it should be designated here as well. As should details regarding the process that will be followed if there is a desire to extend it.
Performance and Development Schedule
This section usually contains a franchise development schedule (generally delineated in terms of how many sub-franchisee units will be added over what period of time), and the provisions made for its success or failure. Usually these provisions will mean changes to the territory, timeframe, or exclusivity of the agreement.
Both parties should strive for realism of expectations in this area in order that potential conflicts be limited.
But just in case, make sure your agreement includes...
Conflict and Dispute Resolution Procedures
These should be defined in no uncertain terms. This section should also contain details regarding which country's commercial laws the agreement abides by. Usually this is the law of the brand franchisor's base country.
Any methods of international commercial arbitration that will be used in the event of dispute can also be specified here.
Master Franchise Agreement Fee Structure
Both the initial franchisee fee paid by the master franchisee, and any ongoing fees (often called royalties) should be laid out here. Details regarding the split of sub-franchisee franchise fees will also be listed.
Termination Procedure
Clear provisions for bankruptcy, material breach of terms, or any other unusual circumstances that could lead to termination - and how such a process will be handled - should be included within the master franchise agreement document.
How should you handle your master franchise negotiations?
Veteran franchisors who already have successful master franchises set up in multiple international locations may have a strict agreement that they won't deviate much from. They've worked long and hard to discover what gets them the best deal, and you might not be able to convince them to do it any other way.
However, a newer or less expansive franchise company might be open to constructive offers that will let them expand into new markets without putting up a large amount of capital. Consider:
Does their brand have the level of customer awareness in the target market to justify the master franchise fee they're asking for? Are the systems they have in place the most efficient ones of their kind - good enough to warrant that level of investment from you?
If there's a good case to be made that your brand franchisor is lacking in any particulars like these, you've got grounds to negotiate franchise fees and responsibilities.
From the other point of view, as a brand franchisor offering master franchise opportunities, it's in your best interest to make sure that you're the opposite:
The owner of the most efficient, effective, and well-marketed franchise brand in the business.
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