A master franchise system is one in which a franchise brand establishes a relationship with another party to grant the latter the right to recruit new franchisees in a geographic location. The agreement those two parties sign is a Master Franchise Agreement. The master franchisee typically pays some money to the master franchisor and takes on some or all responsibility to train and support new locations in their area. The master franchisees are sometimes referred to as sub-franchisors because their role is similar to the master franchisor except in a given location.
Most franchisors use this strategy as an international growth strategy, expanding out of their local markets. According to a research survey, 20% of all US-based franchisors use master franchising to expand outside US borders.
Let’s start with why franchises exist at all. Franchises enable the product to be made available in a larger region and to a larger amount of people. This is because it might not be viable for corporate to run and manage that many locations. The franchisor gives up control of the day-to-day and some money in exchange for their brand to be spread to more locations by managing the look and feel of its locations.
A master franchisor grants the master franchisee, or sub-franchisor, the right to operations in a given geographic zone. The subfranchisor assumes the role of the franchisor in that area, but they typically will not own or operate the franchise. A master franchise allows the company holding the franchising permit to benefit from management talent and more accessible capital.
These factors lead to a greater market penetration worldwide and give the company a competitive advantage as management in a location is better able to understand the ins and out of running the business there. This leads to higher growth rates for the franchise.
When there is an additional layer of abstraction added, there are bound to be inefficiencies in the system. This raises administrative costs for the master franchisor too. Because a master franchise agreement cannot possibly cover everything that the subfranchisor must do, the latter can find a loophole in the agreement and exploit it to its own advantage.
Another huge reason why some bigger businesses are hesitant to subfranchise is that they are afraid of brand fragmentation. Once there is an additional layer of management between them and the final location, it is very much possible that the end product is ever so slightly different in service, visual appeal, and product offering than it would have been if the master franchisor directly franchised. If that difference is very wide, it might end up causing trouble for the master franchisor as not only will people come to expect a different quality of service at different stores, and they might also form a negative image of the brand due to the quality of service rendered.
Another huge reason is that in addition to increasing costs, this system also decreases revenue. The subfranchisor will also take a cut out of what the master franchisor would’ve gotten in full otherwise.
The subfranchisor enters into contracts with subfranchisees to expand in the location.
There is no standard master franchise relationship and it comes in various flavors:
Let’s look at three Janitorial/Cleaning Services Franchises to see an example of three versions of a master franchise model:
JanPro calls its Master Franchisees Regional Developers. Their Regional Developers are local franchisors that recruit entrepreneurs to start their own businesses by becoming master franchisees under the JanPro brand. Regional Developers support their Certified Franchisees with training, client acquisition, and other services. Regional Developers also serve in the capacity of a coach, mentor, and advisor to help their unit franchisees grow their businesses.
Under the Master Franchise agreement, Mint Condition grants master franchises under the trademark Mint Condition, and certain other trademarks, tradenames, service marks, slogans, and logos. As a Master Franchisee, you offer and grant Unit Franchises to competent players that will provide commercial industrial, institutional cleaning and maintenance services and related services for customers. The Master Franchisee also solicits and establishes accounts for services for customers within their Territory that the Unit Franchisees will service. Lastly, the Master Franchisee is tasked with creating separate FDDs and Unit Franchise Agreements for the sale of the Unit Franchises and grants them the right to use the proprietary names and logos of Mint Condition.
Jantize actually does not offer Master Franchises. Even though everywhere on its website, Jantize claims to offer Master Franchises, its model is not a three-tiered model at all, but an Area Development Agreement model. Let’s look at how that is different from a master franchisor-master franchisee-subfranchisor relationship below.
A master franchise is different from an Area Development Agreement (ADA) because the subfranchisor is not required to develop its area itself. Panera Bread is an example of a firm that operates on the ADA model. Once you enter into an ADA with Panera, it will train you in operations and continuously support you until you fulfill your agreement of opening a certain number of locations in a given amount of time. Historically, Panera has sold agreements that require the development of around 15 locations in 5 to 6 years. Sometimes these agreements also include the role of a master franchisee where you will be handling multiple franchisees, such as in the case of Jantize.
The master franchising model takes the two-tier franchise model and extends it to three tiers with the division of responsibility between all three tiers. If done right and a healthy, efficient relationship is established between the master franchisor, master franchisee/subfranchisor, and sub franchisee, the cash flows are increased for the franchisor. In addition, this has the benefit of providing greater penetration in the global market, better brand recognition, and more opportunity to reach people.
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