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Master Franchising - What is it?
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Most of us know that a franchise is an Agreement between the originators of a business or concept and a person who wants to duplicate the originators concept in exchange for paying a fee. But what is a Master Franchise?
A Master Franchise is a franchisee who has been given special rights by the franchisor to develop the brand within a certain geographical area or territory. For most growing franchise systems in the United States that are expanding nationwide this can include granting rights to an entire state, such as all of Florida. For an international franchise system, a Master Franchise Agreement would grant rights to an entire country, province or territory. Master Franchises follow two schools of thought, 1) a large Area Developer or 2) a Mini-franchisor.
First let's discuss the area-developer-styled Master Franchisee. This type of Master Franchisee wants the entire territory granted to them. The Franchisor grants the Master Franchisee the right to operate more than one franchise within the defined area based upon a defined development schedule which should always be determined before the Franchise Agreement is signed. A typical development schedule requires the Master Franchisee to open a franchise unit within the territory every 12 to 18 months for smaller retail spaces. For the larger footprint franchises, such as resorts and hotels, it is not uncommon to see a development schedule that requires a franchise unit opened every 3 to 5 years. Franchisors typically grant the area-developer-styled Master Franchisee a significant discount on the required franchise units under the development schedule after paying the first franchise unit in full. The discounts achievable under a Master Franchise Agreement can be as much as 50% off subsequent franchises. Franchise fees for all the required franchised units are classically due up front when signing the Master Franchise Agreement. The agreement will sometimes require that the Master Franchisee open up additional units as determined by the Franchisor as needed within their territory.
Although the area-developer-styled Master Franchisee is a popular method, the most common method is the mini-Franchisor type Master Franchisee. This Master Franchisee acquires an entire territory for them to develop as well as sell single and multi-unit franchises within the granted territory. The Franchisor will typically require a minimum development schedule for the territory as well as a training curriculum development schedule. The minimum development schedule will typically be the same as those under the area-developer-styled Master Franchisee. Under the mini-Franchisor type agreement, the Master Franchisee will also learn and be required to train new Franchisees that are awarded a single unit by the Master Franchisee. The Master Franchisee will typically be required to provide franchisees with their initial training, grand opening training, follow-up training and support. The training curriculum development schedule can last from a few weeks to an ongoing annual requirement. All of the collateral materials required for a training program are usually the responsibility of the Master Franchisee. They will be required to translate all of the Franchisors manuals into their countries languages, along with sales and marketing materials. It is also the duty of the Master Franchisee to relay back to the Franchisor any particular or potential issues with language barriers or slogans and terminology that will not be received well in the Master Franchisees culture within their territory. The franchise world is riddled with menu faux pas and misinterpreted slogans that effectively caused franchises to fail in a particular region or country, because thorough due diligence was not performed on the areas cultural aspects.
Master Franchise Agreements can range from a three year contract to fifty years or more. The minimum and maximum term of a Master Franchise Agreement can also be regulated in various countries. Almost every country, including emerging small countries, has some type of Franchise Relationship code or law. All Franchise Relationship laws are not created equal. If you or your organization is considering establishing or buying a Master Franchise, it should seek sound legal counsel from an attorney who solely practices in Franchise Law.
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