3 Reasons Why Master Franchise Agreements are Not Good Ways to Expand

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Like other areas of business, franchising has its own jargon or vocabulary.

The terms "master franchise" or "sub-franchise" and "area developer" have technical definitions, but are often used improperly. This article will help to define a master franchise or sub-franchise and area developer and distinguish them from other forms of expanding a franchise.

Franchise systems sell a master franchise (also known as a "sub-franchise") in order to more rapidly expand their brand and system. Often master franchising is used internationally. In that context, a master franchise or sub-franchise may be sold to a person or entity to sell franchises on the franchisor's behalf in another country.

The master franchisee has the responsibility of selling franchises throughout that country. Typically the master franchisee will sell, train and support the franchisees of that country and act as their franchisor. This may make sense for the franchise system that is interested in expanding globally.

In the United States, certain systems have attempted to sell master franchises for certain states or regions. For example, a system may sell a master franchise for New York state. That master franchisee would be responsible for selling, training and supporting the franchisees of New York. The concerns of this type of system is that often the master franchisee is unable to provide the appropriate support to its franchisees.

A master franchise is distinguished from an area development in which a person or entity who buys a territory or region is required to develop that region him, her or itself.

The area developer would be trained and supported by the franchisor and required to open a certain amount of locations within a certain territory and in a certain timeframe.

Panera Bread® is an example of a franchise that has expanded through area development. They sell a minimum territory of 15 units. The Panera Bread franchisee must develop that territory typically within six years.

Often a master franchise or sub-franchise is not the best manner of expanding in the United States for 3 reasons:

  1. Master franchisees are often under a lot of pressure to sell a lot of units within their territory and do not have the infrastructure to support those franchisees.
  2. The franchisor loses control over its franchisees, leaving the support to the master franchisee who is selling the franchises, and not overseeing compliance with system standards.
  3. In addition, master franchisees are required to have their own disclosure document to present to the prospective franchisees in their territory. Preparation and registration (where required) of the disclosure documents can be quite time-consuming and costly.

A master franchise or sub-franchise may be one way a franchisor can expand rapidly. However, there are concerns that any franchise system or prospective master franchisee should consider. Becoming an area developer for a territory is another means of rapid expansion and has its own concerns.

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Nancy's article does a great job of defining master franchising versus area development franchising.

Unfortunately there are a number of consultants who market to business owners a get rich franchise scheme centered on master franchising.

Master franchising can work well for established franchisors who want to develop internationally.

However new franchisors with little franchising experience selling master franchises to people who have little franchise experience doesn't sound very promising.

Area developers are in an odd position.

They are franchisors when selling.

But, when dealing with the franchisor pursuant to the area developer agreement, they are more like franchisees.

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About this Entry

This page contains a single entry by Nancy Lanard published on October 6, 2013 6:22 PM.

4 Ways to Get Started in Business Right Now was the previous entry in this blog.

New Lessons about Franchisor Joint Employer Liability Cases is the next entry in this blog.

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