A master franchise, or “regional development franchise,” is a business that operates a sub-franchise within a franchise run by a head company or individual. It is useful for franchises that want to expand within a major market or region. A franchise is any business operating under a license provided by another company, which grants the individual or group the ability to market the company’s products or services in a specific territory. For example, if there was a restaurant franchise operating as a part of a multi-national chain in a large city, and the franchisee wanted to take advantage of demand by expanding into other parts of that city, he or she could obtain a master franchise license in order to gain the permission to expand into these territories. These licenses create what is known as the master franchising agreement, or sub-franchise agreement.
The decision to operate a master franchise is usually made based on careful research of the market demographics and capital planning. The company that the master franchisee works for receives the benefit of the market research being done within the specific territory and having their brand further developed in whichever area the master franchisee has chosen to expand into. The master franchisee benefits from the financial, marketing and technological advantages of the overarching company, while retaining the value of the company brand through the master franchise agreement.
The master franchise arrangement is beneficial to the franchisee because he or she keeps a substantial portion of the ongoing franchise royalties owed to them by their franchisees, as well as the majority of the initial fees paid by sub-franchisees to open their businesses. Master franchisees can work out of a home office with low overhead costs, employ few to no workers directly under their supervision and maintain the exclusive rights to operate a brand in a certain territory.
Prospective master franchisees must consider these benefits against the expensive initial fee that is typically charged by the franchisor for the rights to develop the market in question. This fee will generally reflect the size of the territory the prospective master franchisee wishes to obtain permission to franchise under. Additionally, the master franchisee may be required to open a certain number of sub-franchises within a certain period of time. Prospective master franchises also must take into account the costs of recruiting individual franchisees and providing training. Most importantly, the master franchisee must establish that demand is strong enough to justify a business expansion in the region in question.