When you think of franchising, you probably are most familiar with the traditional concept of a franchisor (the corporate franchise brand) offering 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 are considering a foray into franchising.
A master franchisee is a person who has the right, and sometimes the obligation, to sell franchises on behalf of the franchisor. Many times, the master franchisee is required to own a certain number of franchises as well as perform his or her duty of selling additional territories to new franchisees. You can think of a master franchisee as a middle man that helps the franchisor sell franchises and in return is compensated by receiving a cut of every sale.
If you want to become a master franchisee, you must 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 will determine how your relationship will be structured. For instance, some franchisors will allow you to execute the franchise agreement directly with the franchisee while others will require that the franchisee works directly with them. Some franchisors reserve the right to approve sub-franchisees; some franchisors will handle all training, while others will share the responsibility and so on. How your master franchise agreement is set up will be determined by the franchise brand you sign with.
Not all franchisors partake in sub-franchising. If a franchisor decides they want to sub-franchise, it is typically because they are looking to expand internationally into new markets or want to expand quickly and need help in doing so.
For example, Mathnasium Learning Centers, an educational franchise, recently announced that it launched in Australia, India, Myanmar, and Egypt, with master franchise opportunities available in additional markets.
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. The franchisor can help eliminate many linguistic and cultural barriers, and better attract local employees, suppliers, and real estate agents, according to Franchising.com.
However, while sub-franchising was once the most popular method of international expansion, its popularity has been on the decline in recent years as franchisors leverage the internet and technology to better monitor overseas growth.
Deciding to become a master franchisee can be lucrative, but it also comes with additional responsibilities and risks. For instance, if you are 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 is important to speak with a franchise lawyer.
As a master franchisee, you own a franchise or multiple franchises, but are responsible for marketing the franchise concept to other single- or multi-unit franchisees in a territory. Master franchising is the most common method franchises use to break into international markets and typically require that investors 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 will be responsible for:
Becoming a master franchisee can provide you with additional revenue streams and the opportunity to diversify your assets. In addition to the income you will 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.
Franchise area developers or multi-unit developers agree to develop multiple units; this is different than the traditional franchise relationship in that the area developer agrees upfront to open multiple units in a given territory within an assigned period of time. Multi-unit franchise owners who sign single-unit agreements and continue to acquire units overtime are different than area developers because they did not sign a multi-unit agreement upfront.
Area developers differ from master franchisees in that area developers must operate all of their units and are not allowed to sell sub franchises to other franchisees, like the master franchisee is required to do.
Finally, there are area representatives, who
People decide to become area developers for different reasons, but some advantages include:
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.
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.