Trends in Franchising - The Master Franchise Model vs Development Agreements
By Lori Karpman
Lori Karpman is one of Canada’s leading experts on franchising and multi-unit business development models as well as a sought after coach and speaker.
Lori Karpman can be contacted at lori@lorikarpman.com or at 514-481-2722. Click here for more information on Lori Karpman & Company.
Over the past few years the concept of selling master franchises is gaining traction. While both a Master Franchise (MFA) and an Area Development (ADA) Agreement deal with the development of multiple units, the mechanism of growth, the schedule, and the responsibilities of the Master Franchisee (MF) or Area Developer (AD) will vary greatly.
In the Master scenario the Franchisor sells to a Master Franchisee the rights to develop a geographical region. The MF then steps into the shoes of the Franchisor for this region and assumes all of the same responsibilities that the Franchisor has towards all franchisees. That is, the MF develops the territory by selling franchises and is required to provide the same support as a franchisor namely, assistance with getting the franchise unit financed, site selection, construction, training, opening store marketing and ongoing obligations of support and service. The MF’s revenues are its portion of initial franchise fees, royalties and other fees paid to the MF under the franchise agreement.
The most common use of Master Franchising is when brands wish to enter a new geographical territory where they have no knowledge of the market or the culture. Often the market is too far for the franchisor to manage itself, has different laws, customer likes and buying habits, has a different language, currency or time zone. In these cases, local expertise is essential and the franchisor is willing to forego a large portion of its franchise fees and royalties in order to develop its brand internationally. Many US franchisors use MFA’s to enter the Canadian market where geography is not that far, but the customs and business environment are very different, and different within each province.
An Area Development Agreement is another multi-unit option however in this case; there is no right to sub-franchise. The AD must open and operate the number of units agreed upon based on a pre-determined schedule. In this model, either the franchisee or a combination of the franchisee (at minimum 50%) and other partners can own and operate a franchised unit, so the franchisee must be involved in ownership but need not directly operate the business. The AD does not have the massive overhead that a MF does but it does not collect or share in royalties or other fees owed to the franchisor. However, it retains 100% of the profits of its stores as its revenues.
An Area Development Agreement suits many situations and can even be used within the context of a Master Franchise agreement. People who are interested in an ADA are looking to own multiple units and ensure that they will have no competition in their backyard and have control over a specified territory. This way they reap the profits from all stores in one area and benefit from multiple advantages including, volume purchasing discounts, economies of scale in labour, greater overall profits, in house training and marketing, and more. One single franchise can certainly provide a good living but the big money is in owning multiple franchises. Not every franchise purchaser wants to have the obligations that are required of a Master, namely having to sell and manage franchises, and the ADA is a great alternative. It is also welcome by franchisors who like to have multi unit owners who are generally very dedicated; more sophisticated than individual franchisees and require less support.
It is the franchisor that decides whether to offer master or area development options. In both cases, the franchisee will be required to open and successfully operate one location before they will be allowed to develop others. Also, both require that the candidate must be financially secure as this is a large and long term investment. The Master Franchisor steps directly into the shoes of the Franchisor and must assume all the obligations and responsibilities of the Franchisor. This requires it to have the same head office infrastructure namely, development, operations, marketing, training and accounting personnel, all of which need to be remunerated. An AD has no such responsibility but must have the funds available to fund the initial unit and another most likely within the same year.
“Master Franchisees are generally self sufficient people who want to live life on their own terms and build a flourishing business that they can later sell. They are driven to influencing purchasers and getting the best out of them” said Bruce Sweeney, CEO of Simply for Life franchises.
According to Rick Moore, CEO of ActionCOACH Canada, “Master franchise candidates are true entrepreneurs looking to scale a world class brand; it made complete sense for us to acquire the Master License for all of Canada. The business coaching industry is the second fastest growing in the world and an open canvas to populate the country was our impetus for becoming Master License holders of ActionCOACH.”
A Master Licensee has an opportunity to build a scalable and valuable asset. When the time comes to sell or retire, they have built a portfolio of units that can either go on without them or fetch a pretty penny on an acquisition. Area developers have built a stable of locations of one brand and they too have a saleable asset, as each unit can be sold separately or as a group. The major difference in the in the revenues, a master franchisee shares in the revenues that would otherwise be paid in full to the franchisor directly. The Area Developer does not.
Whether it is thru master franchising or area development, both of these models grant the developer exclusivity for a time period in a pre-determined geographical area. If money is abundant, I always recommend the area development route as it provides the greatest return for the least overall investment but only for a smaller market. Master Franchising is the favoured solution if the rights being acquired are to a large area such as a Province or Country. However no matter which model is selected the ability to generate income way beyond that of a single unit is without question.