Master franchising is a multi-unit model that some franchises use to quickly expand their presence in new territories. It offers a win-win-win partnership for everyone involved. Not only does the franchisor and master franchisee benefit from a productive partnership together, but this system also allows for another sub-franchisee to join a profitable business endeavor. Ultimately, a successful master franchise will result in an economies of scale, reducing costs and increasing efficiency for everyone in the franchise network.
What is a Master Franchise Agreement?
A master franchise agreement (MFA) is a type of franchise agreement that allows for multi-area development. In short, a master franchise system is when a franchisor delegates a master franchisee who acts like a franchisor when developing the franchise network within a large geographic area (e.g., country, region). Master franchisees are responsible for recruiting, training, and supporting the sub-franchisees in their region while ensuring that they are adhering to the franchise’s standards and guidelines. A master franchisee will often pilot run some locations before sub-franchising others.
Master franchising is popular in service industries, quick-serve restaurants, and convenience retail stores. A few examples of businesses using the master franchise system include: Pizza Hut, Neighborly and Circle K.
Here is an example of a franchise agreement: Kiosk Concepts, Inc., Master Franchise Agreement
Master Franchise Agreement vs. Area Development Agreement
A master franchise agreement and an area development agreement (ADA) both allow for widespread expansion of the franchise network. They both grant developer exclusivity for a specific period of time in a particular region. The key difference is that an ADA does not delegate a master franchisee in the agreement. Rather, in the situation of an ADA, the franchisor grants a franchisee the ability to open and operate multiple franchise units in a certain territory, but the franchisee is not permitted to sub-franchise to third-parties.
A couple of advantages unique to an ADA include:
- Simpler authority structure – Issues with liabilities or control over sub-franchisees does not exist since the agreement is between two parties.
- High profit potential with less risks – The opportunity to reap benefits from the economies of scale exists with this multi-unit model, but it doesn’t come with the high overhead costs and obligations that a master franchisee has.
One challenging element to an ADA is that it might not be easy or possible to find an area developer with the resources required to develop an entire country or large geographical region. The master franchising model solves that problem since it allows master franchisees to spread the responsibilities for franchise development among multiple sub-franchisees.
4 Things Keep in Mind When Considering a Master Franchise Agreement
To be sure, master franchising comes with unique benefits, but it’s not for everyone.
- Not for beginners – Master franchising is not for beginners in the industry. This business model comes with a high earning potential, but it also demands a significant investment and effective management skills. Those interested in master franchising should be an experienced entrepreneur with a strong background in franchising or a related industry.
- Unique risks – Every type of business ownership carries risks. A master franchisee could be held liable for any sub-franchisees in their region that don’t perform well or violate the terms of the franchise agreement. This risk does not apply to other types of franchise ownership.
- Complex logistics – It’s not surprising that the logistics of running a franchise business might be more complicated when a third-party is introduced. Incorporating proprietary technology, coordinating product distribution, and establishing infrastructure are a few areas a master franchisee should consider especially when evaluating the stipulations in a master franchise agreement.
- Legal considerations – In Canada, certain provinces have franchise statutes, and preparing accurate franchise disclosure documents for potential sub-franchisees is mandatory to avoid legal consequences and potential financial liabilities.
Every type of business model has potential pitfalls, but if you have significant experience in franchising and well-established marketing and management skills, then master franchising is definitely worth considering.
Ready to Invest in a Master Franchising Agreement?
Are you interested in pursuing franchise ownership? Do you think you have the necessary skills and experience for master franchising? Let a FranNet franchise consultant help. We will provide resources and guidance to make the best decision possible. Our services are free to you, so you have nothing to lose and everything to gain. Contact us today to schedule your free consultation!