This blog is a complete guide on Master Franchise
Whenever we think of taking a franchise business, we should know two things. Firstly, what is the right way to take any franchise business? To learn more about it, you can read it here. Secondly, we should have all the pieces of information about that category of the franchise business. All the information would enable the person interested in taking that franchise to differentiate between a suitable and unsuitable franchise business category. For this exact reason, we will understand all the aspects of the master franchise.
Whenever we think of business ideas or franchise business, we rarely think of becoming a master franchisee (henceforth, we will use MF). As a result, unfortunately, we neglect this vital part of the franchise business. Since becoming an MF is not in back of our mind, our attention does not go towards such opportunities. Hence, we miss out on some exciting and profitable franchising options.
So in this blog, we will do a complete analysis of the master franchise model and understand all its aspects.
Definition of Master Franchise
Master franchise refers to a person or organization representing a franchising brand in a particular geographical area. It works as a replica of a franchisor and has a similar role and responsibilities.
Role Of Master Franchise
A Master franchise gets an area to develop. Its job is to appoint unit franchisees, train them, and give the necessary support.
It is the single point of contact for all franchisees in that area. And for taking all this responsibility, the MF is rewarded with a share of franchise fees and royalties.
How may Master Franchises be appointed?
It entirely depends on a franchisor how it wants to appoint the MF. If a franchisor wishes, it can either have one for a whole country or have one for every region or state.
It is also possible that a franchisor directly handles unit franchisees in some areas and gives the master franchise in some areas.
How a franchisor gives a master franchise, we can understand it with the example of MCDONALDS. MCDONALDS is an American company. When it came to India, it appointed two MFs. One for north and east India and the other for the west and south India.
A few years ago, MCDONALDS had differences with one of its MF. So they started to manage that territory by themselves after terminating the contract with that MF.
Now sometime back, MCDONALDS has again appointed a new MF for the same territory. In this example, we observe that MCDONALDS either established an MF or themselves managed the territory depending on the situation.
I am trying to point out that there is no hard and fast rule of appointing a master franchise. It entirely depends on the franchisor’s assessment.
Why does a franchisor give master franchise?
Though there are numerous advantages of appointing the MFs but following three benefits are the key.
1) Franchisor gets a considerable amount of money in the form of franchise fees, which it can use for expansion, repay the debt or utilise in some other productive work.
2) The franchisor gets a channel partner who understands that market very well; this makes expansion easy in that territory.
3) The franchisor does not have to grapple with the day to day operational issues of the area managed by MFs.
What are the Advantages Of Becoming an MF?
1) The benefit of association with a brand name
The benefits of associating with a known brand name are as follows (a) Whenever someone takes a master franchise of an available brand, a lot of their work becomes easy. For example, the unit franchise of a famous brand is easy to sell. (B) Because customers recognise that brand, they do not have to put much money into marketing. (C) Such franchising brands’ systems and processes are robust and settled; they only need to be executed. In this way, the work of an MF also becomes easy.
2) Share in franchise fees and royalty
Whenever an MF sells a unit franchise, it receives a share of the franchise fees. This share of franchise fees depends on what percentage was agreed upon when signing the agreement. But the most popular revenue share is 50-50. But the real earnings of a master franchise is from royalty. Which he gets on every sale made by every franchisee. So when the master franchise recovers the investment made, then this royalty becomes the passive income.
Let us understand this with an example. Suppose someone pays a franchise fee of 1 crore to take the master franchise. The franchise-fee for a unit franchise is INR 10 lakhs, and the revenue share is 50-50. Thus the claim of MF from the franchise fees becomes 5 lakh. Hence, MF will have to sell only a 20 unit franchise to get back his one crore fee. Additionally, the MF will also get the share from the royalty that the unit franchisee pays.
3) Master Franchise gets an assigned territory
Master franchise gets an assigned territory in which it is the boss. Also, there is no competition from anybody else in that territory. As a consequence of no contest, the MF has the opportunity to develop that territory to its maximum potential. Which results in the maximum possible revenue.
4) Master Franchise of a small brand is also helpful
If someone is unable to take master franchise of a big brand because of any of the following reasons (a) due to budget constraint (b) unable to find suitable opportunity (c) no option in the desired territory. Alternately, to begin with, that person can take a master franchise of a small or an upcoming brand. Suppose that person can grow that brand over a while. In that case, there is a real possibility of getting offers for association with big brands or even with international brands.
5) Alternative to expensive Unit Franchise
Those interested in taking the unit franchise of a big brand should be willing to pay high franchise fees, phenomenal setup expenditures, and too high operational expenses. Alternately, such people can become the MF of any upcoming brand. Especially if they would get involved in the business. Though there will be risk but rewards will be high too.
Disadvantages of Master Franchise
If a business has its advantages, then it will have some disadvantages too. But disadvantages or limitations of becoming an MF are the same as those of a unit franchise. But it is essential to know them from the perspective of MF.
1) Dependent on the franchisor for new product introduction
In most cases, an MF cannot introduce a new product on its own. Hence there is dependence on the franchisor to do the needful concerning the new product introduction. As and when the franchisor feels the need, they introduce the new product. But in some cases, an MF has the right to present the latest products as per the local market requirements.
2) No Customisation
A MF does not have the right to customize a franchise model as per the different needs of the unit franchisees. There is a standard franchise model applicable to all the unit franchisees. This standardisation limits a franchisee from attaining the optimum business, resulting in a notional loss in income.
3) Impact of Franchisor controversy and Failure
A MF also gets severely impacted if the franchisor gets involved in controversy or goes bankrupt. Though MF is not at fault yet, it has to pay the price of association.
Points to consider before taking Master Franchise
1) Clear Expectation
There should be clarity on the expectations a franchisor has from its master franchise. Once the expectations are known, a person can decide if it wants to take that master franchise. And in case it decides to go ahead, then MF will work as per the franchisor’s expectations. In this way, an MF can avoid any confusion in the future.
2) Roles and responsibilities of an MF
It is essential to know the roles and responsibilities so that there are no differences between the franchisor and the MF later on.
3) Is the master franchise opportunity aligning with your goals
As an MF, one can be successful only when the master franchise opportunity aligns with the person’s goals. So it is imperative to match the goals and master franchise opportunities.
4) Term of master franchise agreement
It is essential to know the tenure and renewal process of the master franchise agreement. It is so because only after knowing the tenure can a prospective MF decide if it is worth the investment and the efforts.
5) Expected investment and income
It is only after having the clarity on expected expenditure, and income will a prospective MF decide if that master franchise opportunity is suitable for him or not. And also, among all the options available which is the most appropriate.
If you understand Hindi then you can also watch this video
In the conclusion we can say that if somebody has entrepreneurial skill and resources then master franchise is an excellent business opportunity.