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May, 01 2007

Role Of Master Franchisees

MASTER franchising can be one of the most lucrative angles of franchising. In master franchising, the franchisor sells the development rights of a particular area to a master franchisee who, in turn, sells individual franchisees within the territory.

MASTER franchising can be one of the most lucrative angles of franchising. In master franchising, the franchisor sells the development rights of a particular area to a master franchisee who, in turn, sells individual franchisees within the territory. The master franchisee is responsible for attracting, screening, and signing all new franchisees within the territory. In many cases this territory can be quite extensive. Thus the master franchisee's role is very dynamic and challenging.

Responsibilities

The master franchisee buys the development rights of an exclusive territory. The amount required varies from franchisor to franchisor and in many cases from territory to territory but is often tied to the territory population and the number of potential units a specific territory can accommodate. When asked about the responsibilities Capt. V Singh, Master franchisee, NIIT Ltd, said," To invest time and money in developing the system, to manage the sub franchisee by providing guidance and training to educate him and make him understand the business are the main responsibilities as the master franchisee acts as a franchisor for the sub- franchisee."

Darpan Kapoor, Master franchisee, Pepe Jeans said," Understanding of business, capacity to invest in stocks, have HR, sales team, capacity to buy stock at the right time and provide support to the franchisees is the responsibility of master franchisee."

An additional investment needs to be made to open at least one franchise unit in the territory. This unit will provide the opportunity to generate a revenue stream, provide a field training location, and validates the business model.

Supporting this Capt. Singh said," Yes, it is compulsory to have an outlet to show that you run the business, you understand the business and then you must burn your fingers first rather than asking investors to invest, so it is better to know the ins and outs of business before getting into developing of the franchisees."

The primary responsibility is to facilitate the sale of franchisees to qualified prospective buyers. They can sell the units on their own or in conjunction with a broker network but in all cases the franchise company will provide assistance at every step. Speaking about the responsibilities Naveen Rakhecha, Master Franchisee, Cartridge World India says," The overall responsibility of establishing this business to all my stakeholders, expectations which includes my goals as well as the franchisees who have invested in the franchise network are key responsibilities as the master franchisee is responsible for developing the territory."

Rewards

A master franchisee's ways of generating income are expanded over that of a normal franchise. In a normal franchise, product or service is directly offered to the end-consumer such as retail store, whereas a master franchisee can generate income through own stores with a significantly reduced royalty and franchise fee.

The rewards and return on investment is three-fold. When a franchise is sold in their territory the master franchisee receives a percentage of the franchise fee. They also share in the monthly royalty revenue each franchisee pays to the franchisor. This is the most significant component of the reward. As the master franchisee builds out their territory adding more and more franchisees, this monthly revenue stream grows. The third revenue stream will be from the unit they own, which in many cases will be their own multiple units.

Characteristics of master franchisee

Very few customers: The customers are the franchisees. He supports a small number of franchisees who typically own several franchise units.

Very few employees: Typically he will operate a master franchise by himself and then expand to have an administrative assistant, a trainer or other support person and a franchise sales person. As he grows bigger, he adds more of these positions into the staff and perhaps a general manager to run the whole operation and can back away almost completely, if desired. Many master franchisees, after working for three to seven years, retire and live off with extremely good income, spending one or two days a month in the office.

Faster rate of building equity than a normal business: Once he sells a few franchises or opens own stores, he increases the value of his business significantly. Not only does he have an existing business with cash flow, but has additional franchise opportunities to sell which gives the master franchise a higher value earnings instead of normal business earnings.

Option of setting up own franchises at reduced rates: Own outlets create another asset of value. He now has a master franchise with a specific value and also his own franchise with its value. As the value of the franchise increases, it increases the value of the master franchise. These are separate assets which can be sold whenever required.

Supporting this Chandra Gopalan, Master franchisee, Contours Express India, said," The pilot location is managed by the master franchisee but other outlets can be developed by the master franchisee on his own."

Own exclusive territory: Only he and his designated franchisees will be allowed to develop franchises in the territory. Speaking about the territory rights, Kapoor says," You have better grip of the market, know other territories also and master franchisee's stock is also distributed to other franchisees, so there is no stock dumped in the store." More freedoms in a master franchise than a normal franchise: Master franchise helps set the standards of franchise in his area.

Stay up to date on the latest technology: Being part of a larger franchise system allows the best ideas to flow into the corporate office and then into the field. Industry-specific training and support from the corporate office.

Better success rate: Franchises as a whole enjoy a 95 per cent success rate. Master franchisees typically have a better success rate than the normal franchise. All that is required is to find the right franchisor.

Is a master franchise right for you?

A master franchise is a long-term investment, which merits careful consideration. If done correctly, a master franchise can be an excellent vehicle to build a leading concept in your marketplace on a regional or national level. In evaluating your potential for success, you should bear in mind a few factors:

When you buy a master franchise with a view to sub-franchising, you are effectively stepping into the role of the franchisor in the target territory. You probably will be running two separate businesses, i.e. the core business and the franchise business, and these will need separate skills and disciplines.

Which Industry? When evaluating high-potential industries, focus on market demand and competition. Ask yourself: Is this product or service needed? Do we have a growing base of target consumers in this market? When asked why she opted for a foreign brand, Gopalan said," Being a fitness freak, it was actually like an opportunity for me to have a women's only fitness franchise as it is about the perfect health and fitness which Indian women require and women in India are more health conscious today."

Master franchisees are franchise opportunities that allow you to take a business model that has been proven in another country and expand it in your country. As the master franchisee you will have more costs and more potential returns, and should thus evaluate the benefits against the risks carefully. Also, do not make a hasty assumption that the concept would never work in your market. If a business concept is successful in other countries, the chances are good that it will work in your market as well, as long as it is properly adapted for your unique market conditions, she said.

Which Franchisor? When evaluating different franchisors, pay close attention to corporate culture and international experience of the management team. First, you should measure your cultural fit with the franchisor by visiting their headquarters and meeting their management team. A master franchise is a 10 or 20 years relationship, and you must ensure that a mutual comfort level exists between you and the franchisor. Secondly, you will want to ensure that the franchisor's support team includes seasoned international managers with experience supporting master franchisees, not just in operations but in franchising activities.

What is the Return-on-Investment? Similar to real estate investments, with the franchisor you should evaluate your financial returns over a period of five years or more. You should be aware of some key metrics for financial success:

First, you should see a 'fee-on-fee return', meaning you should recoup the cost of your master franchise fee through the sale of sub-franchise within 24 to 36 months. Secondly, you should be 'royalty self-sufficient' within about five years, with revenues from royalties covering your operating costs. In your early stages of growth, franchise fees are an important source of revenue, but as your franchise matures, royalties become the key to sustained profitability.

To Conclude

If you are seeking a national or regional project, a master franchise might be right for you. Compared to a local unit franchise, a master franchise requires a much higher level of commitment, since you will need to develop and support multiple franchise offices across a larger territory. The capital requirements of a master franchise is usually much higher than a typical unit franchise.

Before you begin your search, be sure you know what type of franchise best suits your investment limitations, experience and goals and be sure that it is adaptable to the local market. Talk to as many companies as possible. Walk away from any dealings with any franchise where full information is not provided and their commitment or target market is not absolute. Once you find the right franchise partner, negotiate to structure the right deal. The prestige of owning a master franchise and controlling an entire area can offer you an opportunity to feel great satisfaction.

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