::this post ID is 375::::in categories of ..Franchise ABCs..::

Multi-Unit and Master Franchising: A guide to growing within a franchise system

The franchisee’s perspective
Before franchisors start to franchise their businesses, they typically operate multiple successful locations and prove the viability of the concept before granting franchises to others. The same approach should be taken by franchisees looking to purchase an additional franchise unit.

If you plan to open a second franchise, you must first operate one profitable location, in order to minimize the risk of business failure. Rushing into multi-unit ownership may be tempting, but it could lead to disaster. As the old adage says, slow and steady wins the race.

Just as you did with the your first franchise, you must perform extensive due diligence; in particular, you need to determine whether there has been any material change in franchisor operations since becoming a franchisee. You will need to carefully review the franchisor’s latest disclosure document with the assistance of a legal professional who has specific expertise in franchise law. Of course, before adding another location, you must also be sure you have enough resources (e.g. money, time, staff, etc.) to support the additional demands of a multi-unit investment.

There are a number of advantages to being a multi-unit franchisee. For starters, as owner of more than one location, you may be able to share costs between units and take advantage of economies of scale (e.g. volume discounts) when it comes to local marketing efforts and purchases from suppliers.

Additionally, by enjoying greater market share, you can often exercise greater influence within the franchise system. For example, as a multi-unit operator, you may be in a position to negotiate more favourable financial arrangements or other operational benefits with your franchisor, compared to those you could achieve as single-unit operator. Similarly, the clout that comes with being a multi-unit franchisee may be used to help you negotiate beneficial territorial protections.

With expanded franchise operations come additional financial and compliance obligations (e.g. greater franchise fee remittances, royalties, etc.) to your franchisor. You will likely wish to structure the legal ownership of multiple units in a way that will minimize your exposure (your lawyer can help you with this). You should also consult an accounting professional to discuss financial reporting obligations, which tend to become more complex in a multi-unit operation. Getting proper professional advice well before entering into a new or amended franchise agreement can be expensive, but doing so is necessary to maximize your chances of success as a multi-unit operator.

Master franchising
Master franchising is entirely different from multi-unit franchising. Sometimes called ‘sub-franchising,’ master franchising typically involves three parties: a franchisor, master franchisee (a.k.a. ‘sub-franchisor’ or ‘master’) and franchisee (a.k.a. unit franchisees). In a master franchising arrangement, the franchisor enters into an agreement with a master franchisee, which allows the master to grant franchises to third parties.

The agreement between a franchisor and its master franchisee is called a master franchise agreement. This agreement will designate a territory in which you, as a master franchisee, have the right to grant franchises to other entrepreneurs. In this scenario, you will be required to sell a certain number of franchises within your designated territory and meet various financial benchmarks in accordance with a development schedule. In consideration for this privilege, you will share royalties or other franchise fees with your franchisor. The amount of these fees often corresponds to the number of units you grant or the amount of income your units generate.

Within this structure, you essentially act as a franchisor to the franchisees you sign on to the system, providing guidance, training and ongoing support. In turn, those units remit royalties and other fees to you. Typically, the franchisor is not a party to the franchise agreement between the master and its units.

The master franchising model has many variations and has been used by franchisors as a popular domestic and international expansion strategy. It can be particularly useful for a franchisor that wishes to expand into an unfamiliar country or territory (e.g. a U.S. franchisor expanding into Canada). In this scenario, the franchisor may establish a local master familiar with the target market’s culture, language and business practices to encourage expansion.

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