Expanding your company globally and domestically is very expensive and time-consuming, which is why master franchising makes business more accessible. Master Franchises will be able to help you generate additional revenue and grow your business. So how do you master franchise your business???
In this article, we’ll cover a master franchise opportunity for small business owners looking to franchise their business. If your company offers valuable products or services to consumers, you might want to open additional locations to reach a broader audience. Further, you can increase profits by adding new locations and developing your brand while serving countless customers remotely.
What is a Master Franchise?
Master franchisees are investors who pay a large sum of money to a franchisor to gain access to the rights to develop the brand name within a specific geographic area. The master franchisee is tasked with recruiting and training franchisees in the specific area, as well as providing ongoing support. They can keep all or most of the fees and royalties paid by their franchisees. A master franchise owner operates like a mini-franchisor, managing and reaping the benefits of franchisees within a specific territory.
Why master franchise?
Here, master franchising is a win-win investment for both parties, as follows:
- The franchisor benefits from the sale of the master franchisee by implementing the cash quickly, and it also benefits from someone local who has an intimate and considerable knowledge of the economic, demographic, and cultural landscape in the country or city.
- The master franchisee will share in the ongoing royalties and franchise fees from locations within the designated geographic area in addition to benefiting from the strength of the brand and franchisor support.
- Franchises are ideal for international development, but the franchisor loses a great deal of control and power over the system since responsibilities are exchanged and the process of approving system standards is more difficult. A master franchisee must be determined appropriately to ensure the relationship’s success.
Master franchising can be a mutually-beneficial venture with the right brand and the right person. Every franchisor has a different set of roles and responsibilities for the master franchisee, so make sure it aligns with your goals. Make sure to focus on how long the agreement lasts and what will happen after its termination.
How to master franchise your business?
Depending on the type of business you have developed, you may be able to offer franchises to other entrepreneurs under your brand name. Here are five expert tips on how to master franchise your business:
1. Do your homework.
Business owners study target customers and locations before starting a franchise in another area, but they also need to learn about franchising. The first step is to understand a master franchise agreement, master franchise disclosure document, franchise fees and the laws of other countries regarding franchises.
Before you hire any master franchisees or even consider opening additional locations, you’ll need to draft a master franchise agreement and a master franchise disclosure document.
Master Franchise Agreement
A master franchise agreement exists to ensure that you and your franchisees are on the same page. They should be legally sound and independent of the location of the franchise.
The contract can be tailored to accommodate the needs of a master franchisee, including territory, credit, and other items usually addressed in an addendum. However, to maintain a brand, all franchisees need to sign the same contract.
Master Franchise Disclosure Document
In your franchise disclosure document or FDD, you provide potential master franchisees with all the information they need about your company, your sales figures, and other aspects of your business.
It is a good idea to update the document every year so that it outlines the requirements of the Federal Trade Commission and any state that requires a separate registration. We suggest hiring a franchise lawyer for help.
Master Franchise fees
Master Franchisees must pay fees to companies. Typically, the initial fee is one-time, while the annual fee is recurring. As the franchisor, you are responsible for deciding how much the initial franchise fee will be.
In many franchises, ongoing fees are determined by a percentage of gross revenue. Since these fees are usually beyond the savings of most entrepreneurs, a potential franchisee is likely to need a loan to cover these fees.
2. Experiment before you expand.
Consider your business’ success as well as its challenges before investing in additional locations, taking it one step at a time to make sure you’re not going overboard.
Once you are ready to expand, you can use these lessons to make smart decisions for your company, such as hiring qualified managers and employees.
3. Hire professional help.
Master franchise journeys should not be undertaken on one’s own. Just opening one location is a huge responsibility. Opening multiple locations is an almost impossible undertaking for a single person to handle alone. Managing your FDD and day-to-day operations requires guidance. For the legal and operational steps required to grow your franchise, you should consult franchise consultant groups and a lawyer.
4. Create a marketing strategy.
In order to grow your master franchise, you must market both your product and franchise opportunities to potential master franchisees. Having a solid marketing plan in place for both is essential to your success.
The franchisor is advised to keep their business models simple so the master franchisee will be able to understand them. Larger franchises often require their members to participate in a common advertising fund. This can be a fixed amount or a percentage, such as 1-4%.
5. Establish master franchisee training.
Your company wants to make sure a prospective master franchisee is well suited for your brand and mission. One way to do this is by training each new master franchisee and their employees on the guidelines you’ve laid out.
When you master franchising your business, it comes with some advantages and disadvantages. We’ve discussed them below in detail:
Advantages of Master Franchises
As a rule, master franchising is advantageous for both parties.
1. Growth and expansion.
Especially in regions where the franchisor has no presence, master franchising can be a smart way of growing and expanding a franchise network.
Additionally, a sub franchisor can handle many of the time-consuming tasks that a franchisor normally does. This includes recruitment of franchisees, marketing, and compliance. This allows the franchisor to concentrate on other areas of the business.
2. Increased focus on territories
Choosing an established subfranchisor in a certain region can also benefit a master franchisee by gaining experience and knowledge about that region. A subfranchisor with more local knowledge is likely to be able to address local market differences.
3. Increased profitability
Master franchising allows franchisors to earn additional revenue. Master franchise fees generate substantial amounts of additional income for the franchisor in spite of reductions in other income sources. (As the master franchisee is entitled to a portion of each fee collected).
Furthermore, most master franchise agreements call for the franchisor to receive an upfront fee from the master franchisee which can be substantial and includes a portion of the fees paid by units franchisees. There is no obligation on the part of the franchisee to collect the monies from unit franchisees; thus, the franchisor can “quarantine” the franchisees’ losses through the subfranchisor.
Since the subfranchisor will recruit, appoint, manage, supervise and market the franchise network in the subfranchisor’s territory, the franchisor will also incur lower costs and expenses.
Of course, there are some drawbacks to the master franchising model too.
It is possible for franchisors to lose control over key elements of the franchise network, including unit franchisee relationships, franchise agreements, and compliance.
And also, the master franchise system can give the subfranchisor the right to retain a huge chunk of the sub-franchise monies if the master franchise is structured properly. So you need to have a well-drafted master franchise agreement prepared.
Clauses that should be included in every agreement.
The following is a list of boilerplate/standard clauses that usually appear in a master franchise agreement:
1. Introduction.
In this part, many of the core issues of the deal are discussed in a way that clearly reflects the intention of each party when entering into the deal. The Preamble can serve as a reference tool for defining the context of the entire agreement to be interpreted, as well as providing contextual clarity for interpreting the entire contract. The following components are recommended to be included:
- What the parties are and how they are autonomous from the rest.
- The history of the franchise system.
- Franchise ownership and the consequences of future changes regardless of their origin.
- A document transmitted from the franchisor to the master franchisee before the agreement was concluded and a statement of the parties’ common goals.
2. Granting of rights.
It is typically the goal of the agreement that the franchisor and master franchisee jointly develop the franchise system in the designated territory, with the franchisor allowing the master franchisee to employ the franchise system. Licenses include trademark licenses as well as licenses for the exploitation and use of other Intellectual Property Rights and the grant of franchises to sub-franchisees within the limits outlined in the franchise agreement.
3. Province/Territory.
Each master franchisee should be assigned a clearly defined geographical area. Upon achieving clearly defined targets, whether in terms of turnover or number of sub-franchisees opened, or a combination of both, the parties can decide whether to expand or contract the territory.
4. Obtaining exclusivity.
After the master franchisee makes his/her investment in a designated territory, he/she would expect to be granted exclusivity for that territory in return for his/her investment. A master franchisee generally has unlimited rights to franchise the business in the designated territory, without interference from anyone else, including the franchisor itself, if there are no restrictions on exclusivity.
5. Scheduling of development.
There will typically be a development schedule included in a master franchise agreement detailing the number of franchise units planned for the territory. It is in the best interest of both parties to approach the subject in a pragmatic manner in order to keep the disputes minimal. There should be provisions in the agreement that address circumstances where realistic minimums are not achieved (e.g. limiting the scope of exclusivity granted to terminate the agreement).
6. Expenses.
According to master franchise agreements, master franchisees must pay two kinds of franchise fees to franchisors. The first is an initial fee for the rights granted. The second is an ongoing fee for the use of the franchise system and ongoing support service provided by the franchisor. The franchise fee is charged for using the rights granted and for providing support given in many franchise systems. The initial fee is usually divided into equal tranches, and then the fee for each new unit is assessed.
7. Agreement with the sub-franchise
The master franchisee is generally required to use the standard sub-franchise agreement of the franchisor and to ensure it complies with the local laws (mandatory). It is also possible that the master franchisee retains the right to draft a standard sub-franchise agreement, as the standard sub-franchise agreement includes provisions that are mandatory for the franchisor.
8. Advertisement.
To ensure the success of a franchise system, advertising is essential. A master franchise agreement will typically contain a standard for advertising, defining the respective responsibilities/obligations, control, and financing of advertising. As with regional and global advertising funds set up by the franchisor, the master franchisee and sub-franchisee must contribute to a local advertising fund set up by the master franchisee.
9. Termination
Master franchising agreements will naturally come to an end when the agreed terms expire unless the agreement for renewal has been met. Termination for either party will be stipulated in the master franchise agreement. If the franchisor terminates the master franchisee due to material breach or if the master franchisee files for bankruptcy, insolvency, etc., it’s likely to be determined that the termination took effect.
10. Conflict resolution and applicable law.
Most of the time, the franchiser’s home country’s law is relevant to the choice of law as part of the master franchise agreement. Numerous relevant factors need to be considered to make a well-motivated and useful choice. Arbitration is by and large, less time-consuming, less expensive, and less tedious than litigation for the resolution of disputes under an international master franchise agreement. There is a neutral and adaptable forum, and it is possible for the parties to choose an arbitrator who has relevant subject-matter expertise.
Conclusion
Franchising a business has been a proven way to expand a business. Many businesses have used this method and have grown as an International brand. The decision of whether or not to enter into a master franchise arrangement should be based on a case by case basis. While the above list includes some advantages and disadvantages, not all of them apply to every franchise system. You need to consider the fact of whether a master franchise will be suitable for your business or not.
If you want to master franchise your business both domestically or internationally. Sparkleminds will help you find the best franchisees for you. We have been in the franchising industry for more than 20 years and have helped 500+ clients in their journey of franchising. Connect with us today and make your business grow.
