If you’ve started thinking about franchising as a career or retirement plan, you’ll no doubt already be aware that there’s a lot of terminology surrounding this business model; some of which can be a little confusing. One of these terms is ‘master franchise’ and, in this article, we’re going to untangle this important facet of franchising.
First, though, let’s get a few other things straight:
What is franchising?
The word ‘franchise’ refers to a business that allows individuals to grab themselves a slice of a larger business by setting up their own branch. Examples of franchised businesses include Local Eats, Amazon Logistics and Revive!.
How it works is this; an individual who wants to start their own business but doesn’t want the expense and risk of starting from scratch will pay an initial fee to a larger company to buy the rights to open up a branch of that company. The individual will then pay the larger company a percentage of their monthly takings.
Who are the players?
There are two main players in the franchise game and, these are:
The Franchisor – This will usually be a large, established company that has a business model which can be easily transferred and replicated. Franchising allows the Franchisor to expand their business quickly and easily without a huge amount of up-front costs.
The Franchisee – This is the individual who buys into the franchisor’s business and will open a store or branch of the business in their local area. For the franchisee, this is a great way of getting started in business where a lot of the hard work has already been done for them.
What is a Master Franchise?
We’ve talked about our two main guys – the Franchisor and the Franchisee and, now, it’s time to introduce the Master Franchisee.
The Franchisor is an established company that allows people to open new company branches in selected locations while using their branding, business tools and experience.
A Master Franchisee is, essentially, a ‘mini Franchisor’. Rather than just buying a single franchise from the Franchisor with a modest initial fee, the Master Franchisee will pay a larger fee to obtain the right to expand the Franchisors business within a particular region exclusively. For example, a business person in Leeds might visit a branch of a sandwich shop, Subway, on a trip to Bradford – and may note that there are very few branches of the brand within Yorkshire. He may then approach Subway with a Master Franchise proposal, with which he would seek to set up multiple franchises within the county.
How does a Master Franchise work?
As we know, during a simple franchise transaction, the Franchisee pays an initial fee to secure a franchise business and then pays a chunk of their profits to the Franchisor every month. A Master Franchise works a little differently.
A Master Franchise involves a holy trilogy of participants and, these are:
- The Franchisor
- The Master Franchisee
- The Franchisees
Within the Master Franchise agreement, the Master Franchisee will be tasked with opening a minimum number of franchises within a town, city or country. A Master Franchise contract will generally be longer than a standard franchise agreement and will often cover 10 or 20 years. During the period of the agreement, the Master Franchisee’s responsibilities will include:
- Sourcing of suitable premises for new franchises.
- Performing market research on selected areas.
- Recruitment of Franchisees.
- Training of Franchisees.
- Management of fees to be paid to the Franchisor by each Franchisee.
The role of Master Franchisee is best suited to those with significant business acumen and experience as well as the following skills:
- Knowledge of the region
- Recruitment and training skills
- Negotiation
- Communication
Because of the skills and experience needed, in most cases, it will be necessary for Master Franchisees to reside in the town or country in which they will be operating their franchise businesses.
Why Master Franchising?
Master Franchising is often a logical next step for a large business that is expanding faster than single franchises can facilitate.
For the Franchisor – Grabbing the services of a Master Franchisor means that the Franchisor can hand over the reins of the business for a particular region, leaving it free to focus on other areas. This allows the business to open more branches and, therefore, make more money at a rate of knots.
For the Master Franchisee – This opportunity allows the Master Franchisor to control an entire region as a mini or sub Franchisor and reap the financial benefits. They will often receive between 40% and 75% of royalties and fees from the franchises within their territory.
For the Franchisee – The Franchisee will enjoy the profits from their franchise business, as well as support from a locally based Master Franchisor.
Master Franchising – The Pros And Cons
Master Franchising can be pretty beneficial for all involved. However, before we get too carried away, we’ll look at a few of the pros and cons of the master franchise model:
The Pros
- The Franchisor receives a large financial injection in the form of the fee paid by the Master Franchisee.
- The Franchisor can achieve speedy expansion.
- The Franchisor’s time is freed up.
- The Franchisor can take advantage of the Master Franchisees local knowledge.
- The Master Franchisee, if successful, can make a large amount of money from their franchise businesses.
- The Master Franchisee gains a higher profile within the region.
- The Master Franchisee gains access to an established brand.
The Cons
- The Franchisor will need to relinquish an amount of control over the particular region that the Master Franchisee takes over.
- The Franchisor’s brand may potentially be diluted if not managed properly.
- The Franchisor runs the risk of reputation damage if the region is not managed effectively by the Master Franchisee.
- The Master Franchisee’s role can be stressful as it involves managing multiple branches.
- There are lots of complex rules and guidelines to follow, and the Master Franchisee can be penalised if any of these are breached.
- The Master Franchisee stands to lose their stake if their franchise businesses fail.
Conclusion
A Master Franchise business can be extremely lucrative for both the Franchisor and the Master Franchisee and allow the Franchisor to grow their business into new territories quickly. As with any business, there are some pitfalls to avoid and it’s always a good idea to have a solicitor run through a Master Franchise agreement before signing on the dotted line.
In 2021, franchising is big business in the UK – with over 48,000 franchises currently operating. Getting in on this action is a fantastic way of getting into the world of business armed with realistic financial goals and a great support network.
