Master Franchisee

Single-Unit / Multi-Unit/ Area Development/ Master Franchisee

Within franchising there are a variety of different growth formats used by franchisors. It provides different opportunities for a prospective franchisee. Beyond the single unit franchise where a franchisee has a single location there may be the following potential growth opportunities within a franchise brand. Check with the franchisor to determine if these opportunities may exist with the particular brand you are looking at.

  • Multi-unit is where a franchisee will have multiple single unit franchise agreements. These may or may not be in the same geographical area. The multi-unit franchises may be tied to an area development agreement or master franchisee agreement.
  • An area development agreement is an agreement to open a specific number of locations within a specific geographical area within a specific period of time. The area developer is provided exclusivity for an assigned geographical area, provided that you meet the development schedule or time-lines. Note, that as each location opens, the area developer enters into a single unit franchise agreement for the specific location.
  • A Master Franchisee Agreement provides the Master Franchisee with the ability to sub-franchise and grant franchises to other franchisees, within an assigned territory, as opposed to the area developer who is opening all the locations themselves. The Master Franchisee will typically be responsible to open at least one location themselves and provide some level of support to the franchisees within his assigned territory. For the support the Master Franchisee will receive a portion of the royalties as compensation.

Although generally these definitions are consistent amongst franchisors there are sometimes variations. Some franchisors refer to the “area developer” as a “master franchisee’. Be sure to get clarity from the franchisor as to what his definition is so that you are both speaking the same “language”.

The multi-unit, area development or master franchisees are all similar in that they provide the licensee with the ability to generate revenues from multiple locations. Rather than investing in one location you invest in multiple locations so as to diversify and improve your odds of success. If one location is under-performing it can be offset by the success of other locations. You can also have on-going economies of scale where you share administrative costs between the locations. You can share training expenses, employees and management. The franchisee has greater earning potential while not having to go through more training or a learning curve as you are familiar with the brand and the operating system and are simply duplicating what you know.

Multi-unit, area development and master franchisees will usually come at a higher initial financial investment, offset by the potential for greater returns. You will want to ensure that you have the financial resources to open the multiple locations. Often lenders will want to see some proven performance from the first few locations before lending additional funds for continued growth, especially in today’s current economy. If you fail to meet the schedule outlined in the area development or master licensee agreement the franchisor may terminate the license. You would loose any up front fees that you had paid. You would be permitted to continue to operate the stores that you opened but would possibly loose exclusivity of the development area.

With having multiple locations there is the challenge that has the brand evolves you may be required to upgrade or remodel. This may include changes to the branding elements, equipment, and technology and/ or remodeling the physical premises of your locations. With multiple locations, this can be expensive.

In the event of a Master Franchisee the costs will be shared with other franchisees that you are supporting, however, you may have the challenge of operating your own locations while at the same time working to find sub-franchisees. You will need to hire support staff and infrastructure to provide the support. You will need to grow quickly in order to have the revenues to cover the costs of this infrastructure.

The franchisee who will do well in any of these multi-unit situations is a person who has strong leadership/ management skills. You must be able to delegate the management tasks as you cannot be at every location at the same time. The franchisee must have the ability to work on the business rather than in the business, overseeing multiple locations at the same time.

As with any franchise opportunity, do your due diligence and fully understand your rights and obligations. With multi-unit opportunities you will need to review the area development agreement, or master license agreement, as well as the single unit franchise agreement. You will need to review several single unit agreements as each one will be entered into as you open the locations, and the agreements will change over time. Talk to other franchisees that are operating multi-units to fully understand the opportunity from someone that has been there and done it.

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