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Are Master Franchises Something to Pursue?



Master Franchises Business Relationship Diagram

Should you buy a master franchise if you have the opportunity? The answer depends a lot on your background and experience. If you’ve got a great deal of experience on the franchisor side of the industry, then it might make sense.

But if you have only been a franchisee of one franchise, or you have no experience with franchises at all, then it probably does not make sense to go after master franchises as your initial effort.

What is a Master Franchise?

A master franchise is a complex relationship involving three parties. There’s the franchisor, the master franchisee and the individual franchisee (sometimes called sub-franchisee).

Being a master franchisee is a lot like being a franchisor. In essence, as a master franchisee you are acting like a franchisor in that you are authorized to grant sub-franchises to individual franchisees. Specifically, you:

  • Gain the right to find and select individual franchisees to purchase and run specific outlets, typically using a sub-franchise agreement.
  • Train the individual franchisees on the franchise systems, and give them operational assistance.
  • Are frequently compensated from royalties and marketing and franchise fees paid by the individual franchisees, the same way that a franchisor makes its money.

Your agreement with the franchisor may be from 10 to 20 years in length. The agreement specifies how much the master franchisee can collect from individual franchises, and how much it will owe to the franchisor. Often this is a 50-50 split (meaning the master franchisee keeps half of what the individual franchisees owe, and other half goes to the franchisor). But the terms will vary by franchises.

A master franchisee may or may not own and operate outlets directly. Operating individual franchises is not the main thrust of the relationship. The master franchisee is in more of a supervisory role over others.



Master Franchises Differ From Area Development

Don’t confuse master franchises with area development agreements.

Area development involves buying rights to a territory. In area development, franchisees are buying the rights to establish outlets in a defined territory, like a city or state, that no one else can develop for a period of time.

Master franchising, on the other hand, gives the right to sell outlets in a defined territory — rather than the right to develop them.

It’s possible to have both an area development business and a master franchise, although they are not mutually exclusive.



Why Do Franchisors Grant Master Franchises?

When franchise systems are first getting started, their owners sometimes use master franchising as a way to extend their business and sales capabilities. It takes time, money, and effort to convince individual franchisees to buy individual outlets.

By using master franchising, the franchisor gets access to other people with experience selling franchised establishments. On top of that, the master franchisor receives help training and supporting the individual franchisees. The help that master franchisees provide for recruiting, training and supporting the individual outlet operators helps franchisors to grow their franchise systems more quickly.

What are the Qualifications to Become a Master Franchisee?

Most business people don’t have the background to be master franchisees. They don’t know anything about recruiting, training and supporting franchisees. And success at that takes considerable learning by doing.

Selling franchises differs greatly from running a retail outlet, restaurant or other franchise business. Most people who are good at master franchising learned their craft working for a franchisor or franchise broker, not by working outside of franchising or by running individual franchised outlets.



Successful master franchising requires strong knowledge of the industry in which the franchise system operates as well as the geographic locations where the franchisor is selling outlets. To sell the opportunity to join a franchise system, you need to know both the franchise brand and the market.

Buying a master franchise isn’t cheap. In fact, it takes considerably more money than buying a single franchise. Generally the master franchisee has to both pay for the territory and the cost of establishing individual locations that can be used to demonstrate the value of the system to potential sub-franchisees. All your staff may have to be trained in the franchise systems, involving additional investment.

On top of that, the master franchisee has to pay the cost of marketing the concept to sub-franchisees.

Where Do You Find Master Franchise Opportunities?

Searching for these opportunities is not the same as searching for a typical franchise opportunity.



  • Some franchise directories list master franchise opportunities. For example, the BizBuySell listings identify master franchises for sale.
  • The franchisor may approach you to become a master franchisee, after you’ve run one or more franchises, as noted by the authors of Franchise Management For Dummies. In other words, one path involves developing relationships with franchisors first.

When considering opportunities, decide whether it’s more important to you to be an owner/operator — or whether you’d prefer to recruit and oversee others for franchises. 2 Comments ▼



Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

2 Reactions
  1. I’m not entirely sure what a master franchisee is exactly. Could you offer a brief definition? The article makes them sound like some weird middle-man layer between a company and actual franchisees, but they’re not actually working for the company.

    • Hi Robert, a master franchisee is exactly what you describe — a middleman layer. They buy the rights to a geographic area (usually) from the franchisor and then operate as a management layer. They can grant individual franchises to others, and they manage those franchisees’ performance. For the master franchisee it often is more lucrative than owning a single franchise.

      Anita

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