Where to go next, and how to go about it? | Global Franchise
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Friday 1st July, 2022

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Where to go next, and how to go about it?

Insight

Where to go next, and how to go about it?

Key considerations for franchisors before embarking on master franchising deals

One of my favorite things to do is look at a globe and imagine where I might want to visit next. To the development officers for growing international franchised brands out there, I imagine we share this in common: you too are looking at a globe and wondering where to take your brand next. What’s the next country to color on your company map and help you and your brand in your quest for world domination?

Many brands choose to expand via master franchising, where, as the brand owner, the franchisor appoints a master franchisee to manage its brand in a geographic territory – usually another country (or portion of another country). The master franchisee is granted the right to carry out the duties of a franchisor for sub franchised units in the territory.

Appointing a master franchisee sounds efficient, right? The franchisor is basically giving another party the right to act in its place to represent the brand in another country. The parties’ interests are aligned. The master franchisee is local, so it knows the territory and has contacts locally that it can leverage to recruit, engage, and manage the subfranchisee network and even the local supply chain.

The master franchisee has the incentive and local knowledge to find the perfect real estate for the brand. The franchisor expects the master franchisee to grow the territory and deal with issues that come up, all with the aim to grow. It’s a win-win. Right?

Below are three key considerations that all franchisors should analyze before signing on the dotted line.

1. Quantify the growth strategy for the target territory in realistic units and time

The master franchisee is typically granted exclusive rights to develop the target territory, but these rights should be defined carefully. There are very good reasons to grant exclusivity to the master franchisee. However, the downside is that the franchisor will not be able to develop the territory itself or through others and will have effectively locked itself out of that territory, often for a decade or two and sometimes longer.

For this reason, franchisors should impose a development schedule that outlines the realistic and specific number of units that the master franchisee is required to develop and open (either directly or via subfranchisees) each year.

If the master franchisee completes its development schedule, it will have exclusivity over a territory that it no longer has an obligation to further develop. It is imperative that the master franchisee is obligated to develop the territory to its full potential and cannot simply squat on its exclusive rights, preventing the franchisor from developing the territory.

Therefore, the master franchisee’s exclusive rights should end if it fails to meet its development schedule obligations. At the same time, franchisors should be reasonable and practical. Interim development schedules that are re-set by the franchisor every few years to account for territory realities can be important tools for keeping a master franchisee engaged and focused on ongoing development, while keeping its ability to maintain territory exclusivity reasonably attainable.

2. Appoint the right master franchisee to avoid doing the work of a direct franchisor for a smaller portion of the fees

The franchisor will receive only a portion of the fees paid by sub-franchisees to the master franchisee. On the flip side, the franchisor should be carrying out only a portion of the work and risk that goes into being a direct franchisor.

If the franchisor is performing the duties of a franchisor vis-à-vis the sub-franchisees, then it is receiving only a fraction of the fees but is doing the same work as when acting as a direct franchisor. This scenario may defeat the purpose of appointing a master franchisee.

Therefore, franchisors who have not traditionally grown by master franchising must have a shift in their mindset, being comfortable enough with the skills of the master franchisee to accept that the master franchisee can carry out the duties of the franchisor to justify the master franchisee’s portion of the fees. The franchisor should be able to limit its role to providing the core benefits of the brand in exchange for a smaller piece of the pie.

Choosing the right master franchisee is about more than choosing an experienced operator. Even the best of operators must also have the skills to be a master franchisee. Operators are experts at running units and servicing customers – they are leaders of the team that is delivering the products.

But a master franchisee must be the leader of those leaders. The master franchisee must recruit, select, train, and support sub-franchisees and understand them as instrumental parts of the growth strategy in the territory. At the same time, the master franchisee must carefully look after the brand’s interests by enforcing obligations under the sub franchise agreements.

3. Be meaningfully engaged with sub-franchisees

If the master franchisee that is appointed ends up not being the right partner and there is a legitimate and material reason to terminate them, remember that the master franchisee will likely have the closest relationship with the sub-franchisees.

The franchisor may be able to inherit those relationships by becoming the direct franchisor if there is a termination of the master franchise, but if the franchisor has had no engagement with the subfranchisees prior to that, such a transition can be dicey.

The franchisor should balance its need to let the master franchisee act as its proxy in the territory with a meaningful level of engagement with subfranchisees. The subfranchisees should know the franchisor as a trusted partner that they can approach if there are issues with the master franchisee or other problems that must be addressed at the brand level.

For the right system and with the right partner, master franchising can allow a franchisor to successfully grow its brand in a distant territory quickly and at a low cost. However, without disciplined partner selection, carefully designed development targets and fee allocation, and an appropriate level of franchisor engagement, master franchising can be a complicated and unprofitable risk to your brand.

The author

Ximena Couret is an attorney at the global firm Baker McKenzie, which is ranked Band 1 for Franchising by Chambers Global, with more ranked attorneys than any other firm and described as a “top firm with an international footprint stretching across all continents”

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