Master Franchising: A New Look

Article excerpt

MASTER FRANCHISING: A NEW LOOK

Franchising is often viewed as an industry by itself. However, franchising is not an industry, but a process-- an ongoing contractual relationship between a franchisor (owner) and a franchisee (leasee). Franchising is a distribution method which is being used by an increasing number of businesses for expansion and growth.

Grasping the nature of the franchising relationship is the key to understanding franchising strengths and weaknesses. Most common business-format franchises include fast-food restaurants, domestic cleaners, business services, household cleaning, computer equipment, real estate, convenience food stores, and a variety of other products and services1.

1 Andrea Kostecka, Franchising in the Economy 1984-1986 (Washington, D.C.: U.S. Department of Commerce, U.S. Government Printing Office, 1986), pp. 5-23.

The art of franchising includes the professional and legal obligations of the franchisor to help a franchisee to be profitable and successful. Today some franchises use a new organizational structure that involves a third level of responsibility in the franchising process. The "master franchisor' acts as a middleman between the franchisor and the franchisee.

The term "master franchisor' is slowly developing in franchising practice. The word "master' is used because of the authority relationship over the franchisee. The master franchisor is strongly affiliated with the headquarters of the franchisor organization and is in a superior position to franchisees.2

2 Bonney Levine, "Area Regional Master Franchisor Agreements, Guidelines, Controls and Cautions,' presentation given at International Franchise Association Annual Meeting, January 23, 1985, Miami, Florida.

A master franchisor is an independent business person who has contracted with the franchisor to sell franchises to franchisees in a specific geographic area or territory. The master franchisor may or may not be a franchisee. The master franchisor is responsible for the recruitment and qualifying of franchisees within the given territory (see table 1). The master franchisor is a sub-franchisor, and most organizations have required that they relinquish any operating franchises which they may have previously owned or operated.

The idea behind a master franchisor program is to be able to provide for rapid growth and expansion of franchising throughout the country and into foreign markets. The main role of the master franchisor is to place the right person in the right place with the right product. After the headquarter franchisor has developed the master franchising concept and the franchisees have grown in number, the headquarter franchisor often seeks a buyback of master franchisor agreements.

Six aspects of the master franchisor concept are developed and discussed below: (1) advantages and disadvantages, (2) responsibilities, (3) financing, (4) expectation (performance targets), (5) controls and terminations, and (6) applications.

ADVANTAGES AND DISADVANTAGES

Century 21 Real Estate began a franchising program by distributing master franchise agreements to individuals for territories throughout the United States. They did this because of the more rapid development and growth which it allowed. Master franchisors were charged with going out to find new franchisees within their territories. Most of the new franchisees were conversion businesses--independent real estate agents who became Century 21 franchisees.3

3 Mary Hart, "Master Franchising,' presentation given at International Franchise Association Annual Meeting, Maui, Hawaii, January 20, 1986.

Today, Century 21 Real Estate Corporation has over 6,000 offices in the United States, Canada, and Japan, illustrating the many advantages of master franchising. These include:

increased speed to development

broadened financial base

planned expansion

creative banking

ability to address local competition

rapid cash flow

closeness to customer

little cash needed to start

independent agent

Most master franchisors are individuals who seek to become independent business agents and have high entrepreneurial needs. …