How Does a Master Franchise Work?
A Master franchise may also be described as an Area Representative or Area developer franchise, it is basically when a franchisee buys into a franchise brand to not only operate a location or locations of the brand but also to represent the brand. When a franchisee becomes a Master franchisee owner they become a Sub-Franchisor of the brand and now take on a very different role than a traditional franchise owner.
As Master Franchisees, they would typically purchase the rights to a market where their job is to sell and open franchises of the brand.
How do you Price a Master Franchise?
The price for the Master Franchise is wildly variable, but the formula we’ve used most frequently is the following;
Take the total number of units that could be opened in a market, let’s say the franchisee is opening in California and you determine that 50 locations are possible there. If your franchise fee was $35,000, this would be a total aggregate of franchise fees equaling $1,750,000. We typically price a master franchise territory by taking 10-20% of that number, so at 20% this would be a master franchise fee of $350,000.
How does the Master Franchise Model work?
After the purchase, a master franchisee would typically agree to open at least one unit franchise to use as the prototype unit for their market. This unit would be used for discovery days in franchise sales and for franchise trading purposes in franchise support. The master franchise agreement would specify a development schedule that outlines how many units the master franchisee needs to sell and open each year.
The ongoing fees (both franchise fee and royalty) would then be split between the franchisor and franchisee. The standard would be 50/50, but this will vary depending on roles and responsibilities. For example, if the master franchisee is doing less training and support, you as the franchisor may keep 70% of the royalty fees and pay the master 30%.
Why do Companies do a Master Franchise?
First, the obvious reason should be master franchising allows you to grow faster and expand into more markets. Brands such as European Wax Centre and Subway expanded very efficiently with master franchising. Second, Master franchising allows you as the franchisor to operate leaner with less overhead and fewer people in the field. The master franchisee is taking on training and support functions so you don’t have to.
For more information on how a Master Franchise works, contact us:
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