If you’re a more skilled and seasoned business executive with big dreams, area development might be for you.
Multi-unit franchisees are also considered area developers; the franchisor requires the area developer to open a certain number of units by a specific date. Not only do area developers pay less per unit than if they were purchasing just one, but they also own exclusive rights to a region (portion of a state, state, group of states, entire country, etc.). That means no one else can open that type of franchise within the boundaries of the agreed upon market area.
Some area developers are also known as master franchisees. Although master franchisees are considered area developers, not all area developers are considered master franchisees. Area developers have two options for growing their business: (1) develop their exclusive territory on their own (2) recruit other people to do it for them.
If the area developer chooses the latter option, they are acting as a master franchisee and must sell portions of their exclusive territory to sub-franchisees. The master franchisee then acts as the “franchisor” to their recruited sub-franchisees.
Here’s How Master Franchising Works:
For both the franchisor and franchisee (area developer/master franchisee), area development produces the most potential for rapid expansion. Although franchisors actually give up a lot when closing deals like these, including a portion of the ongoing franchisee fees and royalties within the territory, they get accelerated recognition in an untouched or unfamiliar territory. Plus, the franchisor grows their business in a large market area but technically only has to manage one franchisee.
Master franchisees are responsible for recruiting, training and supporting all sub-franchisees in their exclusive territory. They begin growing their business as soon as they’re able to leverage the capital and full-time management of sub-franchisees.
So, why would someone agree to take on responsibility of developing an entire market territory? For starters, they don’t need to use their own money to expand their business; the recruited sub-franchisees provide most of the necessary capital to achieve this. Even better, master franchisees get the benefit of using a proven system and highly recognized brand.
Master franchisees can also run their operation from the comfort of their home or with a small office. And they only need a few employees to successfully manage their group of sub-franchisees, including an administrative assistant, franchise sales manager, training manager, etc.
Let’s put it this way: Master franchising is more like a business-to-business relationship. The master franchisee’s customers are their sub-franchisees, while the sub-franchisees manage business-to-customer relationships.
It’s Not for the Faint of Heart
Master franchising is not for first-time business owners because it also poses greater risk. Failure to open the agreed upon units by the required date can result in extensive financial penalties, loss of the exclusive territory, losing the deal entirely or even a lawsuit. That’s why it’s important that they have the financial wherewithal, as well as a deep understanding of sales, marketing and operations.
They are more experienced business owners (preferably with franchising experience) with a proven track record of success and are no strangers to running multiple businesses at once. Although a master franchisee’s responsibilities and capital requirements are greater than franchising a regular single- or multi-unit operation, the potential returns are what make it all worth it in the end.