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

The franchisor’s perspective
Master franchising offers a number of advantages for a franchisor. First and foremost, it allows the franchisor to allocate risk to the master and benefit from that individual’s capital resources to further expansion. Put simply, the franchisor does not have to invest the same amount of time, effort and money it would normally use to sign on a franchisee itself. A franchisor can maximize the success of a master franchise arrangement by setting a realistic development schedule for the master franchisee, ensuring the recruitment of a qualified master franchisee and establishing reasonable master franchise fees.

One of the disadvantages of master franchising, from the franchisor’s perspective, is that the arrangement loosens the franchisor’s control over operations. Master franchisees tend to have more direct control over their target markets, processeses and sub-franchisees. This is especially true in cases where the model is used for international expansion. The franchisor often finds itself in uncharted territory and may need to rely on the local experience (and judgment) of its designated master franchisee.

Finally, franchisors must also be aware of ‘worst-case scenarios’ that might occur. For example, the financial failure or drastic restructuring of a high-profile master franchisee can wreak havoc on a franchise system. If a master franchisee exits the system, voluntarily or otherwise, its network of franchisees can be ‘orphaned’ within the system, with no strong connection to the franchisor, making it difficult to re-introduce them to the system. Under these circumstances, a franchisor may need to establish a new master. In this case, the franchise agreements of the unit franchisees may need to be assigned to the new master. Alternatively, the franchisor may step in directly to assume these agreements. Franchisors are typically very careful about the people and circumstances under which they grant master franchisee arrangements.

The franchisee’s perspective
While becoming a master can be the next step in your business progression as a franchisee, you must first perform an honest self-assessment to determine whether you possess the skills and resources needed to be a master franchisee.

For example, successful master franchisees require extensive prior business experience. They are typically sophisticated investors with access to significant financial resources. Usually, a prospective master is on a level footing with the franchisor with respect to bargaining power at the time the master franchise agreement is negotiated. In smaller franchise systems, a master may have been a pre-existing franchisee. Larger systems often recruit a master from outside the system, as the skill set required to market and attract franchise investment may not already exist within the system’s ranks.

The cost of entry can be high. Before entering into a master franchise agreement, you must carefully consider the upfront fees required by the franchisor to obtain the right to grant franchises in a designated territory, as well as the ongoing financial commitments you will have to your franchisor and network of franchisees. Depending on the nature of the franchise agreements with its unit franchisees, the master will need to ensure it has significant resources to conduct sufficient marketing to attract and retain its unit franchisees, as well as other assistance franchisors could be expected to provide (e.g. site location assistance, individual marketing assistance and operational support).

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