Large franchise businesses, such as McDonald’s, Subway, and H&R Block, would find it very difficult, from the very top, to individually vet and approve every single franchisee. Instead, management of franchise corporations find ways to make opening and operating new franchise locations more efficient. One way is by finding individual franchisees who can run multiple locations at once; these franchisees are referred to as multi-unit franchisees.
Another way that franchise businesses may delegate certain ground-level activities is by recruiting, training, and employing master franchisees, who are sometimes referred to as area representatives or sub franchisors. Master franchisees operate as a channel between potential franchisees in a certain territory and the master franchisor. The master franchisor grants certain operational control and discretion to master franchisees.
For example, let’s say a franchise business has entered into a contract with a master franchisee whose territory consists of the city limits of Coral Gables. Any franchisee who wants to open a location of that franchise business in Coral Gables must go through that master franchisee. The franchise agreement will still be approved by the master franchisor, but much of the brunt work would have been done by the master franchisee.
What Do Master Franchisees Get Out of the Deal?
The master franchise agreement will lay out the amount of each income stream that will be allocated to the master franchisee. Usually, the sub franchisor will receive a cut of the franchise fee and the royalty income. Let’s go back to the master franchisee who works in Coral Gables. This master franchisee is entitled to 40 percent of each franchise fee and royalty income in her region.
So, if the franchise fee for each location is $50,000, she will receive $20,000. Let’s say Coral Gables’ flagship location brings in around $2,500,000 per year. Royalty income is set at five percent of that revenue, which is $125,000. The master franchisee will bring home $50,000 as her cut of the royalty income.
Challenges to Master Franchising
Compared to a single-unit franchisee (and many multi-unit franchisees), a master franchisee must commit a significant amount of capital up front. This amount can sometimes be up to $100,000. In addition to the startup capital amount, the master franchising agreement is complex; legal issues arising from that type of contract are not uncommon.
Let Trembly Law Firm Help You Achieve Your Goals
Getting the help of an experienced business-law attorney is crucial to ensuring your master franchise agreement works for you. Our firm has extensive experience in reviewing and negotiating master franchise agreements. Please get in touch with us here, or call us at (305) 431-5678.