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Master franchising has always been seen as the defacto method of international expansion, but its days at the top could be numbered.
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Did I get your attention? Well, master franchising, especially in international franchise expansions, is not dead, nor is it seriously ill.
However, what has been developing in recent years is a trend away from master franchising as the go-to strategy internationally. More and more, franchisors who want to expand beyond their borders are looking at other options, such as area development or other multi-unit structures as a better way to proceed. Why is this?
Traditionally, master franchising has been, hands down, the most popular way to expand a franchise system internationally. In its purest form, a franchisor grants to a master franchisee the exclusive right to expand the franchise system throughout an entire country.
The rights usually come with a hefty front-end payment to the franchisor and the requirement that the master franchisee shares, at least, the royalties received from unit franchisees with the franchisor and sometimes a sharing of all payments by unit franchisees to the master franchisee.
Frequently, the franchisor, instead of researching the foreign market and adapting the concept to fit it, relied on the local knowledge of the master franchisee. The master franchisee would then take on the responsibility of modifying the core business concept and how the franchise offering would be rolled out to unit franchisees.
The franchisor’s primary obligations would be to train the master franchisee about operating the core business and about how to franchise the concept in the franchisor’s home country.
“We can attest to the extremely high failure rate for master franchise deals”
Potential for failure
For those of us who have been active in international franchising – particularly us attorneys – we can attest to the extremely high failure rate for master franchise deals.
The root causes for these failures are many and varied, but the key ones are poor adaption of the business in the foreign market, unsatisfactory returns for the master franchisee, the inability of the franchisor to monitor and maintain standards in the foreign country, and the failure of the master franchisee to open a sufficient number of units.
Understandably, at the top of every franchisor’s wish list is to find a master franchisee that has prior franchise experience as a master franchisee or franchisor and/ or experience with the particular business being franchised. That narrows the field dramatically and makes the search for a good master franchisee that much more challenging and time-consuming.
On the other hand, there are many more capable investors who can be trained effectively to directly operate a number of units within a specific territory.
The case for multi-unit While the investment costs for a franchisor are greater when expanding internationally through a number of multi-unit franchisees in each country instead of through country masters, the returns are that much greater for the franchisor, who keeps all royalties and other payments from franchisees and the benefits, if any, from being a supplier to the franchisees.
The beauty of a multi-unit approach to international franchising is that, if a particular multi-unit franchisee proves themselves capable over time, they can always be rewarded with broader master franchise rights. In this scenario, the franchisor would assign its other multi-unit franchises within the particular country to the new master.
This usually results in a much more sustainable expansion of the system internationally and dramatically reduces the chances of picking the wrong master franchisee.
This strategy can be negotiated at the beginning of a multi-unit relationship, based upon specific performance criteria and thresholds, or left to develop organically as the system expands within the target country.
From the franchisees’ point of view, risk is reduced, because the franchisee can ‘test drive’ the concept before making a larger investment (i.e. significant front-end fees and infrastructure costs) usually required in a master franchise approach.
The foregoing is not a pitch for one approach or another to international franchise expansion. Rather, it is a brief summary of the new thinking about international expansions and the role multi-unit franchising is increasingly playing in such expansions.
Unfortunately, reliable statistics do not exist to measure the volume of master deals versus multi-unit deals and the trends towards one or the other. However, anecdotally, the trend is definitely shifting away from master franchising and towards multi-unit franchising.
Considering the high cost of failure with master franchising, it is certainly worth a second, sober look at multiunit franchising in international franchise expansions.
Edward (Ned) Levitt is a certified franchise executive, a partner at Dickinson Wright LLP, Toronto, Canada, and provides legal services to Canadian and international clients on all aspects of Canadian franchise law.
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