Master Franchising: Entering the game at a higher level

Master franchising is a form of the franchisor-franchisee relationship in which the master franchisee essentially becomes a mini-franchisor for a specified territory. Within that territory, the master franchisee recruits, trains, and provides ongoing support to each franchisee they sign.

In exchange, the master franchisee receives a large percentage of the initial franchise fee and ongoing royalties, typically 50 percent, though it varies. The master franchisee usually agrees to a development schedule, which can include owning and operating their own units.

For U.S. franchise companies, master franchising is most commonly used for international expansion, although it is also used domestically, most commonly by commercial real estate service and maintenance companies to develop territories in major U.S. cities.

Finding a qualified master franchisee for international expansion saves a franchisor the expense (and headaches) of setting up an infrastructure overseas to sell, train, and support franchisees. Partnering with a qualified overseas master franchisee also solves problems of linguistic and cultural differences, and of finding local employees, suppliers, real estate, etc.

Surrendering half of the franchise fee and ongoing royalties to let the master franchisee do all the heavy lifting is well worth it for U.S. franchisors seeking expansion overseas, especially as the domestic economy continues to sputter. Master franchise partners usually have an existing business and infrastructure, experience in sales and marketing, and contacts with local financial institutions.

Both franchisor and master franchisee spare the other the need to reinvent the wheel: the master franchisee buys a proven system and known brand, and the franchisor takes advantage of the master franchisee's existing business, contacts, and expertise. More than other forms of franchising, this is a partnership. And both are using other peoples' money to grow.

Benefits to the franchisor also include rapid market penetration and brand dominance, since the master franchisee is motivated to sell as many units as possible to qualified candidates. Since master franchisees are responsible for training and supporting the franchisees they sign, they also are motivated to select the best they can find. And since they are paid a significant percentage of the royalties, they want to have the best operation possible.

Master franchising is not for beginners. It requires significant capital, not only for the master franchise license, but also to introduce a brand into a new country or region. However, for the successful master franchisee, the rewards are greater than for multi-unit franchisees, area developers, and area representatives. But so are the headaches and responsibilities.

Whether abroad or domestically, successful master franchising works to build out a territory quickly, much as an area development or area representative agreement is intended to do. The critical difference is that with a master franchise agreement, the franchisor does not have to add new infrastructure. Everything is, essentially, outsourced to the master franchisee. The franchisor has no need to add staff for franchise sales, training, site selection, hiring, ongoing support, etc. The master franchisee handles it all.

Master franchisors should possess strong management skills and/or the organization to provide them. Experience in the specific industry is desirable, but not essential; as is experience in franchising. The individual or organization should also possess strong sales, marketing, and operational skills, and be able to train their franchisees to manage their own unit economics to provide maximum cash flow for all parties.

The master franchisee, for their part, receives a great deal from the franchisor. In addition to the proven operating system and brand name, the master franchisee benefits from international marketing, ongoing access to the franchisor's newest systems and technologies, and in some cases, to increased profits on products and supplies (as in a hair salon, for example). Along with all that, the master franchisee teams up with a partner who is very interested in their success, and who can offer support in management, leadership, and other high-level skills to help run the organization.

Master franchising takes the traditional two-tier franchisor-franchisee relationship and adds a third tier, taking the relationship from win-win to win-win-win. When all parties are contributing as agreed, and the marketplace cooperates, the cash flows faster for franchisees, master franchisees, and franchisor alike.

Published: December 1st, 2009

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