When faced with the prospect of expanding a franchise into a new territory, many franchisors employ the model of master franchising. As opposed to direct franchising (where one franchisee is granted the right to open one business) or area development (where one franchisee is granted the right to open several businesses across a particular region), master franchising contemplates something larger.
A master franchisee is a bit of a hybrid franchise entity, because it acts as a franchisee in its operation of one or several businesses, but is also granted the right to be a franchisor and sub-franchise to franchisees across a specified region, such as a province, state or country.
However, the road to successful master franchising is fraught with potential pitfalls along the way of which both franchisors and prospective master franchisees should be aware. The first problem encountered by franchisors is picking the wrong master franchisee. For an emerging franchise system, it can be very flattering to be contacted by an entrepreneur who adores your brand so much that he/she wants to develop it across Canada, the United States, Europe or (quite commonly these days) the Middle East.
But successful master franchising isn’t just based on enthusiasm, and too many franchisors make the mistake of acting on that flattery and permitting a master franchisee to develop a territory which the franchisor otherwise had no interest in entering. And if the franchisor had no interest in that territory, that franchisor may be less likely to actively supervise the operations of that particular franchisee. Far too often does a franchisor travel overseas to visit its master franchisee only to learn, upon a rare physical inspection, that brand standards and policies have not been followed at all.
Likewise, master franchisees may find themselves unsuited for the role they have assumed, despite all the enthusiasm in the world for the brand, if they are not sufficiently capitalized. Sometimes this is a result of simply not having enough cash on hand, but other times it is due to a franchisor having underestimated the costs necessary to start up in a foreign market, as well as basing its cost estimates on its own productivity and efficiency. This may not translate well to the new territory and is, of course, detrimental to the brand’s value.
Master franchising continues to be a successful model for global expansion but those ambassadors of the brand should be selected not simply for their eagerness or net worth alone. Alignment with the interests and philosophies of the franchisor is vital to a prosperous relationship.