Buying a master franchise
By Tony Fitzpatrick
Buying a Master Franchise is a major undertaking. A master license is usually much more expensive than the cost of a local or “unit” franchise and you’ll need deep pockets to promote it properly. Equally important, you’ll need to convince the Franchisor that you have the management capability to run the business.
The financial outlay might be high, but the rewards can be worth it. While a unit franchisee might be happy to make a “comfortable” living, the master franchisee may be looking for profits in excess of €500,000 when his network is firmly established.
Running a master franchise involves replicating in your country or region (a country with a large population may be divided into several regions) what the franchisor has already done in his. You’ll need to hire staff, establish support structures, and promote the business to attract suitable franchisees. It’s a role for a real entrepreneur, not someone who is risk averse.
A Master Franchise agreement gives you the right to operate, sell, and service franchised units in a defined territory using a form of franchise agreement approved by the franchisor and requires the master franchisee to enforce its franchisees’ obligations under such agreements. These need to be fair and equitable and written in English. Ask your solicitor to check.
The franchise agreement will usually include a development schedule--a performance clause—which stipulates the minimum number of units you need to sell each year. Are the targets realistic? Failing to achieve the minimums can be a cause for termination so don’t sign up to the impossible.
The operation of both master and unit franchises is carried out according to operation manuals prescribed by the franchisor. Both the master franchise agreement and unit agreement are integral to each other. They must be consistent and enforceable.
While the initial term of a unit franchise is usually five years, a master license may be granted for 20 years with an option to renew. Such a lengthy term is necessary since it could take several years before the master franchisee’s network is established and his investment pays off.
Buying a master franchise is potentially a good idea if you are an experienced manager with sales and marketing skills and have run a multi-unit business in the past. You are building an asset which can fetch a substantial price when you come to sell. The franchisor’s brand is well established and systems are in place. But how sure are you the business will work in Ireland? Check the risks. Cultures differ, and success in one country doesn’t guarantee success in another.
While the franchisor will offer his best advice you will need to research the market thoroughly yourself before making a decision. Has the business got “legs”? Will it survive in the long term? Unless the brand is big enough to have potential franchisees clamoring to sign up before the concept is proven here you should consider opening a “pilot” franchise yourself. It could be a useful showcase for franchise sales.
Apart from the fee you pay for the master franchise, what other monies is the franchisor expecting from you? It is normal for him to receive a fair share of the fee you get from the sale of each local franchise and also a portion of the monthly management fees that you collect from your franchisees. This is not unreasonable, since he will be training your franchisees and you will have the benefit of his systems and ongoing support and the pulling power of the brand he may have spent millions creating.
About the author: Tony Fitzpatrick is managing partner of Franchise Your Business who offer a complete consultancy service to both start up and established franchisors in Ireland and the UK. He is a Board member of the Irish Franchise Association. Contact Tony on 0872449186 or firstname.lastname@example.org