Dr John P. Hayes offers advice on how master franchisees can select the right brand
Not everyone is cut out to become a successful master franchisee, but what’s worse is the huge percentage of “could have been successful master franchisees” who buy the wrong brand and struggle or fail. Why do they do that? It’s all the more frustrating knowing that had they selected a brand that was better suited for them, they could have succeeded.
Buying the rights to expand a franchise in a large market sounds like the perfect opportunity for someone who wants to become more than a multi-unit franchisee. However, unless you know how to match your personality to a master license opportunity while implementing the due diligence that leads to buying the right brand, you’ll probably buy the wrong brand. It’s easy to make a mistake, especially when there are hundreds of tempting opportunities looking for master franchisees.
To help ensure that you buy the right brand, follow these 9 steps:
1 Invest time to understand the meaning of franchising and especially master franchising. Read a book or an article, talk to a franchise coach, visit a successful master franchisee, join a webinar, or watch a video. Most people are confused by the word franchising. It’s not an industry. It’s not a secret formula. And it’s not just for fast food. Franchising is a method of distribution. It’s a way for franchisors (think corporate office) to expand their footprint by using other people’s money (think franchisees) to distribute their products and services to consumers who may be just down the road or on the other side of the world. Franchising is also a system. In fact, that’s the reason for franchising’s success. A good franchisor creates a successful operating system and teaches the system to franchisees. Similarly, a master franchisee learns the system, implements the system, and usually teaches the system to sub-franchisees. Some master franchisees choose not to sub-franchise, but they still need to master the system.
2 Invest time to understand the role of the franchisor, the master franchisee, and the unit franchisee. The franchisor is always in charge! So, if you’re thinking you’ll buy a franchise and do things your way, you’re wrong. The franchisor creates the operating system and requires all franchisees to follow the system. Master franchisees get the opportunity to oversee the implementations of franchisees, but masters still must follow the franchisor’s system. Masters that sub-franchise also must be capable of teaching the system to unit franchisees and supporting them. Failure to follow the system almost always means the franchisee will struggle to succeed and most likely will fail. And if a master franchisee’s unit franchisees fail, the master eventually fails, too.
3 Find out if you’re a good fit for master franchising. You could postpone the first two steps until you complete this step because if you’re not cut out for operating a master license nothing else matters. Master franchising is not for everyone, and if it’s not for you you’ll become a miserable licensee regardless of the brand you buy. It could be heralded as the perfect brand, but unless you’re a good fit for franchising, and for doing the work of a master, no franchise is likely to work for you.
Furthermore, just because you’re a good fit for one franchise doesn’t mean you can buy any franchise and succeed. Franchises are not created equally. Each requires different skills and values from master franchisees and unit franchisees. Until you recognize your skills and values, and match them to franchise opportunities, you’re taking an unnecessary risk when you buy a franchise.
4 Decide how much you can afford to invest. Master licensing requires a hefty chunk of money. You’re buying the rights to develop a brand in a country or a region. If you don’t plan to sub-franchise, you’ll need capital to open and operate multiple units in your territory. If you do plan to sub-franchise, you’ll essentially replace the franchisor in your territory. You’ll need money to market and sell franchises and then train and support franchisees. The franchisor’s initial licensing fee may be only the tip of the iceberg financially.
5 Choose the industry that fits your personality, your interests, and your pocketbook. More than 75 primary industries use franchising as a method of distribution. You’ll find lists of franchises by industry at both the International Franchise Association the British Franchise Association and other portals such as FranchiseExpo.com.
6 Choose franchise brands that fit your personality, your interests, and your pocketbook. Within each industry there may be hundreds of franchise brands, but not all of them seek master franchisees. You may need to look at dozens of companies to identify a few that make sense for you and your market.
7 Get as much material information as you can to help you investigate the history and performance of the franchise brand. Ultimately, you’ll be required to sign a master license agreement. Get an advance copy of the agreement so that you can study it and know what you’re committing to do and for how long. Ideally, you want to see the franchisor’s audited financial statement. Is the franchisor profitable? Can the franchisor afford to support master licensees? If a franchisor is dependent upon selling franchises to meet payroll and overhead, and isn’t collecting a steady stream of royalty income from franchisees, you should take note of that weakness.
8 Get a list of the brand’s master franchisees with contact information. Even if you get minimal information about the performance of the brand, if you talk to master franchisees (possibly even former licensees) you can get a good idea of the brand’s value to its franchisees. There are dozens of questions to ask master franchisees and perhaps the most important one is this: “Given what you know about the franchise company today, would you invest in it all over again given the chance to do so?”
In addition to interviewing master franchisees by phone and email, visit one or two. In fact, you could arrange to spend a week or more observing the master franchisee’s operation to get a better sense for the requirements, the opportunity, and the benefits. Keep asking: Does this brand make sense for me? For my territory? For my financial capabilities? For my talents?
9 Consult with your advisors. You should hire a franchise attorney from your own country and work with an accountant who is familiar with franchising. These professionals will not tell you whether or not to buy a brand, but they should point out the pros and cons if you do or don’t. Franchise brokers and coaches may also be good advisors.
Master franchising is a fabulous opportunity for people who want to build a franchise network without being a franchisor. But it only works for those who are cut out for master franchising and who buy the right brand.
ABOUT THE AUTHOR
Dr. John P. Hayes is the Titus Chair for Franchise Leadership at Palm Beach Atlantic University in West Palm Beach, FL. He is the author of Take the Fear Out of Franchising which includes detailed information about how to conduct franchise due diligence. Dr. Hayes blogs at HowToBuyAFranchise.com.