When you are thinking about buying a franchise, one of the key factors to consider (among many others) is the size and geographic dispersal of the franchise system. This includes not only the number and location of unit franchises, but also the number and location of any master franchisees.
Not all franchisors have master franchisees. In fact, most do not. Having master franchisees adds a layer of management to the franchise system—and this can have both positives and negatives for everyone involved. If you are thinking about buying into a franchise system that has master franchisees, what do you need to know? Franchisee attorney Jeffrey M. Goldstein explains:
3 Key Aspects of Master Franchise Arrangements for Unit Level Franchisees
When a franchisor grants master franchises, its master franchisees are responsible for working directly with unit level franchisees. Master franchisees are “subfranchisors,” which means that they grant and manage franchises on the franchisor’s behalf. This has three key implications for unit level franchisees:
1. The Franchisor Still Has Control Over the Franchise System as a Whole
While you will generally be dealing with your master franchisee instead of the franchisor (if you buy a franchise), the franchisor will still have control over the franchise system as a whole. Establishing and enforcing system-wide brand standards is essential for franchisors, as this both: (i) allows them to manage their systems effectively; and, (ii) allows them to build strong and recognizable brands that attract both franchisees and customers.
This means that your master franchisee will be limited in its ability, and its incentive, to address any concerns you may have about the franchisor’s system standards. While master franchisees are “subfranchisors,” their primary role is sales. They don’t own or manage any aspect of the franchise system on their own. As a result, not only can’t they address unit level franchisees’ concerns directly in most cases, but their ultimate priority is to keep their master franchise and sell more franchises. If you have concerns as a unit level franchisee, your master franchisee may not want to rock the boat with the franchisor. In fact, it may prefer instead to look for another franchisee who will fall in line.
2. But, Your Franchise Agreement Will Be With the Master Franchisee
Despite everything we’ve just discussed, if you buy a franchise, your franchise agreement will be with the master franchisee. This is the “subfranchising” aspect of the relationship. You will be beholden to your master franchisee—which will need to strictly enforce compliance in order to remain compliant with its own master franchise agreement with the franchisor.
In large franchise systems, master franchisees can effectively act as franchisors—and attempting to address any unit level concerns with the franchisor will usually prove futile anyway. But, in smaller systems, where franchisors contract with master franchisees in an effort to expand quickly without building infrastructure of their own, having a master franchisee that serves as a gatekeeper can prove very frustrating. This is especially true if the master franchisee lacks experience or has not invested the time and effort necessary to truly understand the franchise system. With this in mind, when considering a franchise with a master franchisee, doing your due diligence on the franchisor and doing your due diligence on your master franchisee are equally important.
3. Your Master Franchisee May Have the Right (or the Obligation) to Open Its Own Units Within Its Development Territory
When doing your due diligence, one thing you will want to find out is whether your master franchisee has the right (or the obligation) to open its own units within its development territory. If there is a chance that you could end up competing with your master franchisee, then ensuring that you have adequate territorial rights will be especially important. There are several key considerations when evaluating territory rights in franchise opportunities. If your territory is labeled as “protected,” this almost certainly means that it is non-exclusive. Even if it is labeled as “exclusive,” there may still be carve-outs to this exclusivity—including carveouts for “company-owned” locations.
While territorial encroachment can be a concern in any scenario, it is often of particular concern in franchise systems with master franchisees. Lack of experience, lack of understanding of franchisees’ territorial rights, lack of resources to effectively define non-overlapping territories, and an ultimate focus on selling franchises in order to meet their contractual obligations to the franchisor can all make master franchisees more prone to encroachment.
Is It Really a Master Franchisee?
If you are considering a franchise opportunity and have been told you will be working with a master franchisee, it also is worth asking the question, “Is it really a master franchisee?”
Along with master franchises, franchisors use a variety of other multi-tiered systems to sell franchises as well. Oftentimes, even franchise executives aren’t familiar with the correct terminology, and they will use the term “master franchise” to refer to other types of systems.
For example, another fairly common multi-tiered approach involves establishing “area representatives.” Area representatives are essentially salespeople—they do not enter into franchise agreements, but instead identify candidates to enter into franchise agreements with the franchisor directly. While area representatives may have some management responsibilities as well, they are not intermediaries in the same sense as master franchisees.
Ultimately, as a prospective franchisee, the key is to ensure that you go into your franchise opportunity with a clear understanding of the relationships involved. By making informed decisions, you can avoid unhappy surprises, and you can give yourself the best chance of succeeding within the franchise system you’ve chosen.
Discuss Your Franchise Opportunity with Franchisee Attorney Jeffrey M. Goldstein
If you are considering a franchise opportunity that involves working with a master franchisee, franchisee attorney Jeffrey M. Goldstein can help you make an informed decision about whether to move forward. To learn more in a free initial consultation, please call 202-293-3947 or tell us how we can help online today.
