A look at franchise development into new markets with master franchising

BY NICK EMPSON, BUSINESS COACH & FRANCHISE CONSULTANT, LEVEL UP BUSINESS COACHING & CONSULTING

Going global with your franchise brand can be an exciting way to grow your business. One way to achieve this is through the master franchise model. There are a number of upsides, but it may not be appropriate for all businesses. In this article, I’ll provide some insights into what master franchising is and offer additional considerations to help you decide whether expanding internationally through the master franchise model is worth exploring.

What is a master franchise?

Before we look at how Master Franchising works, let’s examine some common models.

One of the simplest methods of franchising involves the franchisor granting a license directly to a unit fran­chisee, allowing them to operate their business under the brand in exchange for an upfront fee and (often) ongoing royalty payments. This is known as direct franchising.

Another is the territory manager model, whereby a third-party, typically operating a unit franchise them­selves, will be responsible for recruiting, training, and supporting new units that come on board in that coun­try or territory. The manager, however, does not enter directly into franchise agreements with units. The fran­chisor still maintains this contractual relationship. The territory manager typically receives compensation by way of commission.

Then, we have master franchising, where a third party is also involved. The franchisor has an agreement with a master franchisee, granting them the right to license the brand to unit franchisees in a given market or territory. The master franchisee operates their own separate legal entity which signs the agreements with unit franchisees, charging the units upfront and ongoing royalty fees in a way that mimics and is akin to the franchisor.

The basics of master franchising

The basic premise is straightforward:

1. The franchisor provides the master franchisee access to the brand and intellectual property (IP), the operating manual (in its current, local form), equipment, and suppliers, along with upfront train­ing and ongoing support.

2. The core business model should not change, but some localizations can be made (think local food special­ties, for example) and translation of key documents may be necessary.

3. The master franchisee is responsible for recruiting, training, and supporting their own network of fran­chisees.

4. The master franchise collects management service fees (MSF) and royalties from its units.

5. The franchisor collects MSF and royalties directly from the master franchisee.

6. The duration of the master franchise agreement is typically longer than that of unit franchises.

Additional considerations

The model appears simple at first, although it can get a little bit complicated when you get into the details.

You should consider your overall international expan­sion strategy and identify key markets you would like to enter into. It’s likely that you’ll also get inquiries from other markets, so it’s good to have a process in place for undertaking research to determine the market viability in the first instance.

Make sure that the numbers work. As a franchisor, if you charge your unit franchisees a 10 per cent royalty fee, you can expect a master franchisee to charge the same. So, what will you charge your master? Ten per cent? Twenty per cent? Or 50 per cent? The latter may sound high, but remember, you’re only charging them 50 per cent of the 10 per cent that they make from their units, which equates to only five per cent of the total rev­enue for that country.

Ensuring that your business model and unit franchise economics work in a market is critical to its success, but if you’re going down the master franchise route, you’ll need to ensure that the market size is large enough to warrant having a master franchisee in place. A smaller country, such as Cyprus, for example, may not be suit­able for master franchising. Similarly, a country with a large population, but high density, such as Hong Kong, may also not work, depending on your business model.

Remember that registering your IP can take time and that you may not have the trademark registered when you come to sell the master franchise rights to a particu­lar market. This is not ideal, but you can proceed with, at the very least, the application submitted, and a side letter drawn up by a franchise lawyer to cover yourself. In some instances, you may not be able to register the trademark unless you are a citizen or permanent resi­dent of a country—be cautious in such cases if relying on outside help to do this, but it’s entirely possible.

In every market you enter, you’ll need to have your cur­rent franchise agreement localized to reflect the laws of that country. Always work with a reputable franchise law firm to assist you with this.

When it comes to growing your business, expanding internationally through the master franchise model can be a great method to explore. Ensure you have a solid strat­egy in place and a good team of experts, such as lawyers, financial advisors, and franchise consultants to guide you as you embark on your empire-building journey.

ABOUT THE AUTHOR

Nick Empson is a qualified business coach, experienced fran­chise consultant, and world traveller. With a passion for work­ing alongside franchisors to help them take their business to the next level, he focuses on operations, vision, strategy, scal­ing up, and international markets. Empson has 18-plus years’ experience in franchising, including a significant tenure at a multi-award winning, global franchise brand, seeing it grow from a dozen units in one country to over 330 units across 30 countries. www.levelupbcc.com