Key Points:
- A master franchisee holds rights to develop a territory and can sell franchises in a defined territory on behalf of the franchisor, often taking on training and support responsibilities.
- Sub-franchising refers to the relationship where a master franchisee recruits and supports individual franchisees under their territorial rights.
- Master franchise and sub-franchising arrangements can accelerate expansion, especially in new or international markets, but require advanced operational and management commitment.
When you think of franchising, you’re probably most familiar with the traditional concept. A franchisor (the corporate franchise brand) offers an individual the right to own and operate a single unit franchise business through a licensing agreement. (You can read more about the franchise business model here.)
But there are other variations of the traditional franchise model, such as sub franchising and area development, that are helpful to understand if you’re considering a foray into franchising.
What Is Sub Franchising and Who Is a Master Franchisee?
A master franchisee is a person who has the right, and sometimes the obligation, to sell franchises in a defined region on behalf of the franchisor. Many times, the master franchisee is required to own a certain number of franchises as well as perform the duty of selling additional territories to new franchisees.
Think of a master franchisee as a middle man who helps the franchisor sell franchises and in return is compensated by receiving a cut of every sale.
To become a master franchisee, you sign a master franchise agreement and pay a fee. In exchange, you receive the rights to sell units on behalf of the franchisor and receive a percentage of the franchise fee and royalties that your franchisees pay.
There are several different master franchise models. Your franchisor determines how the relationship is structured. For instance, some franchisors will allow you to execute the franchise agreement directly with the franchisee. Others require that the franchisee work directly with them. Some franchisors reserve the right to approve sub-franchisees; some franchisors handle all training, while others share the responsibility and so on. How your master franchise agreement is set up is determined by the franchise brand you sign with.
What’s in It for the Franchisor?
Not all franchisors offer sub-franchising. If a franchisor decides they want to sub-franchise, it’s typically because they want to expand quickly and need help doing so. Or, they’re looking to expand internationally into new markets.
Chipotle, which bought back all its previously sold franchises in 2006, no longer franchises in the US. However, in 2023, it signed an international franchise development agreement in the Middle East to accelerate its international expansion efforts.
Finding a good master franchisee for international expansion saves a franchisor the time and expense of developing an infrastructure overseas to sell, train, and support franchisees. It can eliminate many linguistic and cultural barriers, and make it easier to find local employees, suppliers, and real estate agents.
Who Makes a Good Master Franchisee?
Deciding to become a master franchisee can be lucrative, but it also comes with additional responsibilities and risks. For instance, if you’re unable to meet your obligations under your contract you could be fined by the franchisor and your contract could be terminated. Before entering into any franchise agreement, it’s important to speak with a franchise lawyer.
As a master franchisee, you own a franchise or multiple franchises, but you’re also responsible for marketing the franchise concept to other single- or multi-unit franchisees in a territory. Franchisors typically require that master franchisees demonstrate successful previous franchise experience and the unique skills necessary to work with both the franchisor and the single-unit franchisees under them.
As a master franchisee you’re responsible for:
- Recruiting new franchisees.
- Depending on your arrangement with the franchisor, you may be responsible for collecting and tracking franchisee initial investments, fees, and royalties as well as providing training and support to your sub-franchisees.
- Juggling the competing demands of managing two businesses. You’ll be operating your own franchise(s) and at the same time expanding your territory by signing up new franchisees.
- Paying higher initial investment fees, with an opportunity to reap greater returns based on sub-franchisee success.
Should You Become a Master Franchisee?
Becoming a master franchisee can provide you with additional revenue streams and the opportunity to diversify your assets. In addition to the income you’ll make from franchise fees and royalties, you may have the option to set up your own franchises at a reduced rate.
Aside from the financials, as a master franchisee, you enjoy more control and play a hands-on role in setting franchise standards in your territory.
The Difference Between Area Developers and Master Franchisees
Franchise area developers (or multi-unit developers) agree upfront to open multiple units in a given territory within an assigned period of time.
Area developers differ from master franchisees in that area developers must operate all of their units. They are not allowed to sell sub franchises to other franchisees, as a master franchisee is required to do.
Finally, there are area representatives, who act as a sales person for the franchisor. But unlike master franchisees, the area representative does not enter into a contract with the franchisee. Instead the franchise agreement is made between the franchisor and franchisee. The area representative receives a certain portion of the initial franchise fee of each new franchisee as compensation—much like a sales commission. Typically, area representatives own one or more units within the defined territory.
Should You Become an Area Developer?
People decide to become area developers for different reasons, but some advantages include:
- Exclusivity: As an area developer you won’t have to share your market with other franchisees, minimizing your risk of competition.
- Discounts on franchise fees: Often, developing multiple units gives you negotiating power when it comes to paying full price on franchise fees.
- Reduced royalty fees: The more units you open, the more likely you may be able to negotiate lower ongoing, monthly royalty fees.
Of course, area development rights are not cheap. You should be prepared to pay a substantial sum upfront — either a flat fee or a fee per franchise you plan to develop.
From the franchisor’s perspective, area developers can be beneficial because they allow the franchisor to deal with fewer franchisees. And, since area developers tend to be pretty sophisticated investors and owners, the franchisor may feel more confident in their abilities to run their territory, allowing the franchisor to focus on other efforts beyond sales.
Ready for a Recap?
So, to sum it all up there are four major types of franchise ownership, each with a set of different legal obligations to the franchisor.
Single-Unit Franchisee
This is the most common type of franchise ownership. When a franchisee purchases their first franchise, they are considered a single-unit franchisee.
Multi-Unit Franchisee
If a franchisee finds success with their first franchise venture, they may choose to open additional units from the same franchisor. When a franchisee owns more than one unit, they’re a multi-unit owner.
Multi-Unit Area Developer
Multi-unit area developers are like multi-unit franchisees, except they agree to develop a certain number of locations within a specified time period in an area. This approach is best for franchisees who are looking for market exclusivity and have the resources to secure that exclusivity with the franchisor.
Master Franchisee
Master franchisees are like a multi-unit area developer in that they’re obligated to open a certain number of locations in a specified time period and area. However, a master franchisee may, and is sometimes obligated, to sell franchises to other prospective franchisees. The master franchisee acts as a middleman for the franchisee and the franchisor.
Frequently Asked Questions About Master Franchisees and Sub-franchising
What’s the difference between a master franchisee and a sub-franchisee?
A master franchisee is granted rights by the main franchisor to develop and manage a defined territory and can sell franchise units to other operators. The franchisees they recruit are called sub-franchisees. The master franchisee often has direct contractual and support responsibilities.
How does sub-franchising work in practice?
In sub-franchising, the franchisor allows a master franchisee to act almost like a regional franchisor. They recruit sub-franchisees, provide training and support, and sometimes collect fees and royalties on behalf of the franchisor for that territory.
When do franchisors typically use a master franchise model?
Brands often use master franchising to expand rapidly into larger regions or international markets where local expertise, language, or regulatory knowledge is valuable. It allows the franchisor to grow quickly without building the infrastructure themselves.
What are some risks or challenges with master franchise and sub-franchising arrangements?
Because they introduce an additional layer of management between franchisor and operational franchisees, these arrangements can create complexity in training standards, communication, and performance oversight. It often requires experienced leadership at the master franchisee level to maintain system consistency.
