Franchise Flag Maker

As a franchise sales consultant I am often asked what are the advantages of the master franchising business model and buying a master franchise. Master franchising, some times referred to as sub-franchising, is a form of franchising that allows an individual to buy the rights from a franchise company (The Franchiser) to sub-franchise their business concept in a specific territory or large geographical area. In general the individual or master franchisee’s goal is to sell and open a pre-determined amount of franchise units in his or her specific territory. The master franchisee benefits from populating his territory with new franchise locations by receiving a share of the franchise fees and royalty fees generated by each unit opening and operating in their designated territory. 

The reason master franchising works is that it creates a “win win” scenario for both franchiser and the master franchisee. By allowing its concept to be sub-franchised and developed by qualified individuals broken down by territories, the franchiser can often grow its system much faster and more efficiently than trying to sell single units itself. The master franchisee in return can also benefit in numerous and significant ways from this arrangement including the following below. 

Residual Income: The ability to develop a residual income stream is in my opinion the most attractive benefit and number 1 reason to buy a master franchise. Although all franchise agreements are slightly different, typically the master franchisee and franchise will split the royalty fees (typically 5 to 7%) generated by the units opened in the master franchisees territory. Imagine getting a nice fat royalty check every month based on the gross sales from all the franchise units in your territory you sold. This is a personal income stream that can potentially last a lifetime!   

Franchise Fees: With most master franchising agreements when you sell a franchise unit in your territory you typically receive a franchise fee or commission from the franchiser for your efforts. These fees tend to range anywhere between $15,000 to $30,000 and generally most franchise agreements allow you to keep all or most of it! 

Low Overhead: Because being a master franchisee at the end of the day is a “sales job”, there is no real need to rent or lease a retail office space. You can in most cases easily start out in a home based office and accrue all the benefits and flexibility that option offers including low overhead, no commute, generous tax deductions, more personal freedom, and a better lifestyle. 

Few Employees: Most master franchisees typically start out as a 1 person owner operated business. Once the business reaches a certain critical mass regarding number of units sold or operating, you may in some cases find it advantageous to hire some support staff such as an administrative assistant or sales assistant to keep the business growing and running smoothly. In general however, most master franchisees don’t have a lot of employees and all the headaches and costs associated with having a large staff. 

High Success Rate: As with all franchise businesses, master franchises generally enjoy a very high success rate. Keep in mind however that not all master franchising opportunities are alike.  It’s important to make sure that you adequately investigate and research any franchise opportunity before moving forward. As part of your due diligence I would ask the franchiser if you could speak with an existing master franchisee in their system to get some feedback on their experiences.

Franchising is a business model where a franchisee gets the permission start a branch that uses the name and methods of the franchisor in exchange for royalty fees. It differs a bit from starting your own business due to the fact that you are using the proven business strategy of an established company. An article by the Financial Times concluded that sales by franchises in the United States – if translated into gross national product – would rank in as the world’s 7th biggest economy.

1. Franchise Examples

- McDonald’s

- Kentucky Fried Chicken

- Wendy’s

- Burger King

- Swiss Chalet

- Food chains

2. Want To Be Royalty?

These large chains do not actually invest in new branches or outlets; they have interested franchisors to invest for them. In return they keep the income and instead pay back royalties on food sales (or other royalty schemes, depending on the franchise). Franchises are an appealing business to invest in because they already have an established business model that has been proven to be successful. So, it follows that investing in such businesses have a greater chance of success. Plus, you have the backing, training, and expertise of the franchise at your disposal.

If you are considering buying into such a business, you should consider the background of the franchise. This is in addition to the questions regarding the fees, organization, and support.

- Have many franchise owners gone through the branch you are planning to buy?

- Observe the way business in conducted at these branches

- Pay special attention to the customers and, if possible, interview them

- Do this with every branch you plan to buy or are considering to buy

3. Things to Consider

Some prospective owners look at the buying price of a franchise when considering buying into them. Unfortunately, they forget to factor in other expenses such as employee salaries and operating expenses. These factors are crucial in knowing if you can really make a profit out of the business. This problem is further compounded if the business requires more employees or if the business needs more managers. If you don’t consider these expenses, you might find yourself over your head in the budget department as the actual buying price plus salaries, operating expenses, and even debts could easily double your expected budget.

Don’t just jump into a franchise business; do an inventory of your goals and your strengths when considering which franchise you want to purchase. You might be considering buying into a fast food franchise when you do not have any interest in the food business. In some way, that could be suicide. Stick to your forte and use your strengths to your advantage.

4. Budget

Always, always work within budget. Remember you are either buying into an existing franchise or starting a new branch. It wouldn’t do well to start in debt. An accountant would come in handy when considering a franchise. Have them look at the numbers and analyze how the particular business is going. These professionals have experience in assessing and evaluating how that business is going. If they raise the red flag, you may want to reconsider buying into the business.

5. To Each His Own

Franchises do not suit everyone, however, they do present a relatively intriguing business prospect. As with any potential investment, make sure you do your homework diligently. Investigate with all your might. It is your hard earned money at stake here. If you do your job right, well, you may have a potential gold mine in your hands. Do not be complacent once you purchase a franchise. If you exerted effort when you still did not own the branch, you may have to exert more afterwards.