Master Franchise Agreement Pros/Cons

Stephen S. Raines
President, National Franchise Associates
Atlanta-based Specialists in Franchise Consulting & Franchise Development Success

In my over three decades of experience as a franchise consultant, I am often asked “What makes one company succeed in franchising while another doesn’t?”

Rarely is there a single reason for success or failure in franchising.  Here, I will examine some of the many factors that can help you create a successful franchise program.

As a franchise consultant, I often address with potential Franchisors the different types of franchises, each requiring its own Franchise Agreement.  There are three main types:

  1. Individual Franchise Agreements
  2. Area Development Franchise Agreements
  3. Master Franchise Agreements

Each of these Franchise Agreements has pros and cons.

With individual unit franchising, you sign a Franchise Agreement granting one franchise operation, usually within a specific territory.  With an Area Development Franchise Agreement, you and the Area Developer negotiate a territory, the number of franchise operations to be opened and a timetable for opening those franchises.  If the Area Developer does not meet the Franchise Agreement terms, the territory reverts back to the Franchisor.

With a Master Franchise Agreement, the Master Franchisee is granted a territory in which to sell franchises, assist the franchises sold and receive the bulk of the funds generated from initial franchise fees and royalties. Again, if the Master Franchise Agreement terms are not met, the territory reverts back to the Franchisor.  In my March blog, I addressed the pros and cons of the Individual Franchise Agreement and in April, the pluses and minuses of the Area Development Franchise Agreement.

The pros of a Master Franchise Agreement include:

  • Master franchising has the potential to generate the fastest growth to build your brand and revenues.
  • The Master Franchise Agreement requires less of your time and effort to sell, train and service franchises.
  • A Master Franchise Agreement provides economies of scale that help franchises operate more efficiently.
  • If in your business, the Franchisor sells products or services to individual franchisees, you can generate more sales more quickly through master franchising.

The cons of the Master Franchise Agreement include the following:

  • Choosing the wrong Master Franchisee can have tremendous negative impact on your brand and your franchise program.
  • You can lose control of your franchise program.
  • Historically, master franchise programs are not as successful as Individual and Area Development Franchise Agreements.
  • Master Franchise Agreements are more suited to certain industries, such as service businesses.

You must carefully explore which type of Franchise Agreement(s) best meets your goals for franchising your business.

To be continued…