One of the very first choices you make as you franchise your brand is that of franchise model. Meredeth S. Jones weighs master franchising against area developing
With the current industry shift from single-unit owner/operators, who traditionally dominated franchising, to visionary entrepreneurs interested in multi-unit ownership, now is a good time to explore the two most common ways in which an individual/entity may acquire the rights to develop a brand in a pre-determined territory.
Both the Area Development Agreement and the Master Franchise Agreement are used to rapidly expand a brand’s presence both within the United States and internationally.
For purposes of this article, we are going to define the area development as an agreement between the Franchisor and Franchisee which allows the Franchisee to open a number of locations within an exclusive territory over an agreed period of time.
The Franchisee is directly supported by the Franchisor through marketing, training and ongoing support. If the Franchisee fails to open the locations, they may be subject to financial penalties or a loss of exclusivity within that territory.
Realistically, if a Franchisee is having difficulty meeting the timeline, there is usually room for renegotiations to continue to make it a win-win scenario.
What are the fees associated with entering into an Area Development?
Franchisors may structure the area development costs as a lump sum fee paid upon entering into the agreement, which can be an amlgam of the full franchise fee for the first location, half of the franchise fee for each additional location they are committing to open, and the remaining balance of the franchise fee for each additional location, due as each franchise agreement is signed for the remainder of the locations under the agreement.
In recent years, this model has become more mainstream amongst franchisors, with some requiring a multi-unit commitment as the cost of entry into franchising with their brand.
Advantages of a Master Agreement
1. percentage of the franchise and royalty fee
2. complete control over your business “empire”
3. territory exclusivity
4. prestige & influence within the brand
5. additional revenue streams through offering services to your franchisees (book keeping, accounting, additional training, etc.)
Advantages of an Area Development
1. exclusivity of a market during the term of the agreement
2. control of the brand’s quality & reputation in your territory
3. ability to build wealth
4. discount on franchise fees
Master Franchising (also known as a “sub-franchise”) is the most common way a franchise system expands their brand internationally, although this agreement is also used within the U.S. for regional development outside a brand’s typical footprint.
The Franchisor grants exclusive rights to the master franchise allowing them to sell franchises on the Franchisor’s behalf.
The master is then responsible for acting as the “local franchisor” by recruiting, training and supporting their franchisees throughout their region or country. In turn, the master keeps a percentage of the franchise fee, royalties and marketing fees (to be spent on local marketing efforts) generated from each location that is opened under this “sub-franchise.”
The benefits of a master franchise for the franchisor is capitalizing on the local knowledge & expertise, relationships, & logistics that person and/or entity may have.
What are the possible fees associated with entering into a master franchise?
Some, but not all, franchisors structure their agreements based upon a lump sum payment, paid to the franchisor, for each location to be opened within a specified amount of time, and the remainder of the franchise fee, not kept by the master, to be paid to the franchisor at each franchise location signing.
This is collected from the franchisee recruited by the master franchisee. Other cost considerations for the master franchisee might be the need for their own FDD based on regulations in their region or country and the expenses associated with recruiting and training their own franchisees.
Clearly, becoming an area developer or committing to take on the responsibility of a master franchise is not a job for the novice.
However, if you are looking to diversify your portfolio, these are both solid options for consideration. Having a solid background running multiple units within one brand or different brands along with the sales, marketing and operations experience, will help mitigate some of the risk associated with these agreements.
ABOUT THE AUTHOR
Meredeth S. Jones CFE is Founder of two chicks consulting, a boutique consulting firm with over 20 years combined franchise sales & development change agent expertise, improving and streamlining the franchise sales/development process for franchisors across multiple industries, including restaurant & bar, retail, health & wellness, and childcare. Meredeth’s diverse franchise experience uniquely positions her to also provide consulting services to entrepreneurs looking to own their own business. https://www.linkedin.com/in/meredethsjones/
