Foolproof Master Franchising

 Foolproof Master Franchising

International master franchising is the most sophisticated form of franchising expansion. It is typically the most expensive form of international franchising program to establish, and often takes longer to generate profits than the other most common forms of international franchise expansion, unit franchising and area development franchising. Master franchising is also the most prevalent form of international expansion used by franchisors. And, because of its complexity, it is the form of international franchise expansion that is most likely to result in problems.

With all of its challenges, however, master franchising programs and agreements, when structured to address the most common problems, can be highly successful. By following the steps discussed below, franchisors can avoid or mitigate costly mistakes.

What do we mean by “master franchise” or “area development franchise”?  Here are our definitions:

An area development franchise involves only two parties, the franchisor and the area developer. The area developer is granted a territory within which he must open an agreed number of franchised outlets. Before opening each outlet, the area developer must sign a unit franchise agreement. Nonrefundable fees are usually paid for the development rights. Additionally, initial franchise fees and royalties are typically paid pursuant to each franchise agreement.

Three parties are involved in a master franchise program. The franchisor signs a master franchise agreement with a master franchisee granting a territory that must be developed at a rate established by a development schedule. The master franchisee is usually required to open one or more franchised outlets himself or through an affiliated company, and he also has the right to grant franchises to third parties (subfranchisees). The master pays a nonrefundable fee for the rights to the territory, and agrees to pay the franchisor a portion of the initial and ongoing fees derived from each outlet in the territory.  Each outlet operates pursuant to a subfranchise agreement to which the master franchisee and a subfranchisee are parties, but typically not the franchisor..

Master Franchising: What could possibly go wrong?

The principal problem experienced by international franchisors and master franchisees is that they don’t articulate their respective expectations for their relationship. They don’t quantify their reasons for targeting a particular territory, country or franchise partner. They don’t identify what they are likely to spend on each transaction, how the master franchisee candidate will generate the profits needed to make the investments worthwhile, and what level of growth and unit performance is needed to generate profits needed to justify the investment.

With articulated expectations, franchisors can assess potential markets, candidates and the plans that need to be developed to exploit opportunities. Unless every party involved in master franchise programs, franchisor, master franchisee and subfranchisee achieves his minimum goals, the program cannot succeed.

Because international franchising typically requires more time and resources for success than does a comparable investment in additional franchise development in a franchisor’s domestic market, establishing realistic expectations for, and obtaining the full support of, the franchisor’s CEO, and board of directors is critical to the success of an international franchising program. Demands for generating quarterly profits from a start-up international franchising program are usually inconsistent with the realities of international franchising, which often requires 3-5 years before a franchise achieves profitability in a market.

Planning for failure by not planning for success

Every business plan requires a thorough evaluation of the opportunities for generating revenues and profits, as well as a fundamental understanding of the capital and marginal expenses that are needed to achieve profitability. Franchisor executives and prospective master franchisees who lack international franchising experience frequently underestimate the range of expenses that they will incur in an international master franchising program. Beginning an international franchising program without budgeting for the likely costs is like taking off in an airplane without understanding how much fuel will be needed to reach the planned destination. Although a list of the typical costs of international franchising is too long for inclusion in this article, it is available [in Zwisler and Krakus, “Avoiding Common Mistakes in International Franchising,” International Journal of Franchise Law, International Journal of Franchising Law Volume 14 – Issue 3 – 2016, pages 12 and 13.] [from the author]

When developing their business plans, both the franchisor and the master franchisee candidate should clearly identify each likely cost and when each cost will be incurred, and the source of funding for the cost. They should also use market research to assess likely average unit volumes and budget conservatively.

When developing their cost models, franchisors should assess which franchising format will work best in each targeted territory. Territories that will not support a significant number of outlets will often not warrant the expense of using master franchising. Area development may be a better approach.  Although master franchising is designed as the fastest growth model, the initial cost of establishing a master franchising program and of localizing it in a new country is generally more expensive than the cost of using area development franchising.

Involve international consultants and lawyer early

Top international franchise lawyers and consultants provide expertise needed to develop international franchising plans. They should be able to identify the best franchising strategies for use in a given transaction, identify problematic or costly markets, and help to prepare budgets for each transaction.  International franchise lawyers should prepare form international agreements, LOIs, and disclosure documents that both protect the franchisor and avoid unnecessary negotiation. They should alert franchisors to legal, tax and IP issues that are likely to affect net returns from doing business in each new country before a franchisor initiates a transaction in a new country. Lawyers also provide strategies for minimizing agreement registration and translation costs, minimizing withholding taxes and expediting cash flow.
Ultimately, by focusing on goals, preparing and executing plans with master franchisees who share a franchisors goals and culture, franchisors have a great chance for success in international franchising. 

ABOUT THE AUTHOR
Carl E.Zwisler is a lawyer who advises franchisors, manufacturers, and investors in structuring, negotiating, and enforcing domestic and international franchise, licensing, distribution, and acquisition agreements. Carl may be reached at carl.zwisler@gpmlaw.com, +1-202-295-2225

Global Franchise Meets.

An inspirational new web video series where we meet the business leaders and influencers in International Franchising.

you may be interested in

franchise directory

  • TaxAssist Accountants

    Business & Professional Services, Financial Services, <100K, Featured

  • Cafe2U

    Food & Catering, Coffee, Take-away, <100K, Featured

  • 0800 Pizza

    Food & Catering, Fastfood, Pizza, Take-away, Featured

view more
Connect with Linkedin Logo
Global White Logo Click Here
Close button

WHAT DO WE USE YOUR INFORMATION FOR?

Any of the information we collect from you may be used in one of the following ways: To personalize your experience (your information helps us to better respond to your individual needs) To improve our website (we continually strive to improve our website offerings based on the information and feedback we receive from you) To improve customer service (your information helps us to more effectively respond to your customer service requests and support needs) To process transactions your information, whether public or private, will not be sold, exchanged, transferred, or given to any other company for any reason whatsoever, without your consent, other than for the express purpose of delivering the purchased product or service requested. To administer a contest, promotion, survey or other site feature To send periodic emails The email address you provide for order processing, will only be used to send you information and updates pertaining to your order. Note: If at any time you would like to unsubscribe from receiving future emails, we include detailed unsubscribe instructions at the bottom of each email.

HOW DO WE PROTECT YOUR INFORMATION?

We implement a variety of security measures to maintain the safety of your personal information when you place an order or enter, submit, or access your personal information We offer the use of a secure server. All supplied sensitive/credit information is transmitted via Secure Socket Layer (SSL) technology and then encrypted into our Payment gateway providers database only to be accessible by those authorized with special access rights to such systems, and are required to keep the information confidential. After a transaction, your private information (credit cards, social security numbers, financials, etc.) will not be stored on our servers.

DO WE USE COOKIES?

Yes (Cookies are small files that a site or its service provider transfers to your computers hard drive through your Web browser (if you allow) that enables the sites or service providers systems to recognize your browser and capture and remember certain information. We use cookies to help us remember and process the items in your shopping cart, understand and save your preferences for future visits, keep track of advertisements and compile aggregate data about site traffic and site interaction so that we can offer better site experiences and tools in the future. We may contract with third-party service providers to assist us in better understanding our site visitors. These service providers are not permitted to use the information collected on our behalf except to help us conduct and improve our business.

DO WE DISCLOSE ANY INFORMATION TO OUTSIDE PARTIES?

We do not sell, trade, or otherwise transfer to outside parties your personally identifiable information. This does not include trusted third parties who assist us in operating our website, conducting our business, or servicing you, so long as those parties agree to keep this information confidential. We may also release your information when we believe release is appropriate to comply with the law, enforce our site policies, or protect ours or others rights, property, or safety. However, non-personally identifiable visitor information may be provided to other parties for marketing, advertising, or other uses.

THIRD PARTY LINKS

Occasionally, at our discretion, we may include or offer third party products or services on our website. These third party sites have separate and independent privacy policies. We therefore have no responsibility or liability for the content and activities of these linked sites. Nonetheless, we seek to protect the integrity of our site and welcome any feedback about these sites.

CHILDRENS ONLINE PRIVACY PROTECTION ACT COMPLIANCE

We are in compliance with the requirements of COPPA (Childrens Online Privacy Protection Act), we do not collect any information from anyone under 13 years of age. Our website, products and services are all directed to people who are at least 13 years old or older.

ONLINE PRIVACY POLICY ONLY

This online privacy policy applies only to information collected through our website and not to information collected offline.

TERMS AND CONDITIONS

Please also visit our Terms and Conditions section establishing the use, disclaimers, and limitations of liability governing the use of our website at globalfranchisemagazine.com/terms-conditions

YOUR CONSENT

By using our site, you consent to our online privacy policy.

CHANGES TO OUR PRIVACY POLICY

If we decide to change our privacy policy, we will post those changes on this page

CONTACTING US

If there are any questions regarding this privacy policy you may contact us using the information below. All correspondence relating to the Website should be sent to: Global Franchise 21/23 Phoenix Court Hawkins Road Colchester Essex CO2 8JY Email: subscriptions@aceville.co.uk