A foreign master franchise isn’t really a different form of franchising. What happens is that a South African entity, usually a company, acquires the master franchise rights for the country from a foreign entity. Seeing that the concept of franchising is universal and applied in the same way all over the world, there should be no surprises here, but beware. Bringing a foreign concept to South Africa has a nice ring to it, yet this is one area of franchising where failures exceed successes by far. Not that there is necessarily something wrong with the foreign concept, what it usually boils down to is a combination of factors, for example:

• an overestimation of the pulling power of a foreign concept by the would-be master franchisee
• insufficient commitment by the foreign company to understand the target market and partner the master franchisee in making the transaction successful
• a lack of understanding of the complexities involved in a cross-border deal on the part of both parties.

In South Africa, these problems are further compounded by the practical reality that most license deals are entered into with overseas franchisors. This is not necessarily a bad thing either, but you have to contend with differences in consumer taste, lack of brand recognition and the impact of foreign culture. Add to this the possibility that co-operation takes place “long distance”, possibly even involving a foreign language and the potential for problems will become obvious.

Just picture this: during a visit to some exotic location, you came across a concept that impressed you. You concluded that this is precisely what your fellow South Africans have been waiting for all their lives and approach the company with a request for a license. If they have prior experience in franchising, they will either rebuke your advances or join you in bringing the project to fruition. An outline of why this should be so follows.

What is a Master Franchise?

Foreign master franchises, also known as master licenses or inbound franchises, are franchise opportunities that have proven themselves in their home country but have no presence in South Africa. It will be your job as the master franchisee to bring the system into the country. Before you do so, you need to evaluate potential benefits against obvious risks.

What does it entail?

When you buy a master franchise with a view to sub-franchising you are effectively stepping into the role of the franchisor in South Africa. In effect, you will be running two separate businesses, namely the core business (dealing with the product or service) and the franchise business. For this to be successful you need to create separate skills and disciplines, so normally separate CCs or companies need to be established.

Before you begin your search, be aware that as you will be assuming the mantle of franchisor, you will incur three sets of costs:

• License fees charged by the foreign franchisor.
• Set-up costs arising from the establishment of the pilot unit.
• Set-up costs linked to the setting up of a local franchise infrastructure.

You will read more about this later in this article, and in the article headed Financial implications of franchising.

Beyond that, the same principles apply as if you were to investigate a local franchise offer:

• You need to be sure what type of franchise best suits your investment limitations, experience and goals. For example, if you want to operate just one outlet, a master franchise is not for you.
• You need to establish that the local market is ready for the product or service. In other words, you need to ensure that there are enough people around who want to purchase it and, most importantly, can actually afford it.
• You need to be careful and patient:
• Wait for the right deal with the right company. Walk away from any deal where full information is not provided or the foreign franchisor applies pressure on you to sign the agreement.
• Terminate negotiations with any foreign franchisor who is not prepared to enter into a joint commitment to develop the local market.
• Be prepared to accept that even once you have found the right franchise partner it will still take a long time to close the deal.
• Lastly, you need to ask yourself whether the potential of the deal justifies the initial expenses and ongoing costs. Remember, you will be obliged to:
  • Pay a license fee, which may be substantial.
  • Fund the establishment and operation of the local pilot operation.
  • Create the franchise infrastructure, either from scratch or you may have to modify the master franchisor’s material to suit local requirements. Chances are that this will, among other things, involve significant professional fees.
  • Adapt the product or service to suit local conditions.
  • Attend initial and ongoing training at the master franchisor’s head office, thus incurring initial and ongoing travel expenses that can be substantial.
  • Share initial and ongoing fees with the foreign master franchisor. In this context, you need to keep in mind that for practical purposes, fee levels may be pegged, forcing you to make ends meet with only a portion of the gross income your local competitors earn.

Before you go any further, you need to decide whether it is indeed worth your while to invest in the master franchise. Perhaps it would make more sense to develop a concept locally from scratch? In most instances, unless the master franchise offers you access to an internationally renowned brand or extraordinary intellectual capital, the local option may be preferable.

Negotiating the Deal

At the outset, let us stress once more that you should not be in any hurry to sign a deal or pay over any money. Proceed as follows:

• Examine the product, management and operating systems, purchasing power and marketing prowess of the foreign company during at least one, preferably several, visits to the company.
• Have a lawyer with proven experience in international license deals review the disclosure document and master franchise agreement – what are your rights and obligations – are they protected in the long term?
• Have an accountant view the company's financial disclosures.
• Take a long-term view - normally it takes more time, effort and money than envisaged. How certain are you that you will achieve reasonable returns over time?

Managing the Process

• Choose an experienced South African lawyer who is well versed in the evaluation of licensing agreements to advise you. Remember the US proverb: A man who acts as his own attorney has a fool for a client!
  • Ideally, your attorney should have had prior dealings with the target country, and/or have established contacts there.
  • The negotiation of master franchisee arrangements can be drawn out and become expensive; it is advisable to obtain an estimate beforehand and perhaps put a cap on professional fees.
  • Try to control the drafting process and beware of power shifting that could make the franchise unworkable. (As far as your future franchisees are concerned, you need to be in charge of the South African franchise.)
  • Insist that the franchise agreement clearly sets out the extent of rights to be granted, the territory, exclusivity issues and term and renewal issues. (You would not want to lose your rights after you have established the brand in South Africa.)
  • Ensure the sub-franchise agreement (the agreement you enter into with your future franchisees) is user-friendly and has been adapted to reflect South African conditions.
• You need to accept that the master franchisor is entitled to charge for the granting of rights and the provision of initial and ongoing support. You are entitled to insist, however, that the arrangement is fair and equitable to both parties.
  • on the master franchisor accepting part of the burden – help with market research, adaptation of products to local tastes, translation costs etc.
  • Resist high upfront fees. Keep in mind that over time, you need to recoup the initial fee you pay to the master franchisor from your local franchisees. (Master franchisors know that South Africa’s population numbers over 46 million and calculate upfront fees accordingly. What they overlook is the fact that not every South African has discretionary spending power.)
  • Ensure that the performance schedule for local development is realistic. Some master franchisors dictate that you need to roll out a certain number of units within a predetermined period. Should you agree to an over-ambitious development schedule but fall behind with the roll-out, the franchisor’s share of upfront fees etc. may become payable anyway. This could bankrupt a hapless master franchisee.
• Insist on the master franchisor making his best people available to provide support, and that they do so for an adequate period initially as well as periodically thereafter.
• Come to terms with the fact that you will have to make a substantial investment yet will have to wait a long time to see adequate returns.
• Accept that these negotiations will take a long time, especially when it comes to finances. While there is no set formula for calculating initial and ongoing fees, guidelines do exist. Ensure the initial fees are based on a rational system that not only measures the real value of the license you acquire but also reflects a long-term view of the potential for the business. It is essential to obtain competent professional advice.

Pointers Regarding Master Franchise Fees

• Take into account the actual cost to the master franchisor of dealing with you on an initial and ongoing basis, helping you to set up the business and proving the concept and finally, providing ongoing support.
• Other cost factors you need to take into account include:
  • Costs arising from the translation/adaptation of manuals and marketing materials.
  • Costs associated with the conduct of initial and ongoing local market research.
  • Professional fees arising from the negotiation of the master franchisee agreement (fees for local lawyers and their correspondent lawyers in the country of origin plus other professional fees).
  • Costs of transportation of material.
• Seek maximum flexibility over the payment of initial fees, for example in the form of staggered payments linked to the rollout of the franchise.
• Negotiate an equitable split of ongoing fees and/or mark-ups on the products or services the business sells.

Conclusion

Acquiring a master franchise after a careful selection process will enable you to roll out a concept faster than may otherwise be possible. You stand to receive a ready-made franchise package, benefit from brand recognition and enjoy support from an established franchisor. Provided that you do the necessary homework and become convinced that:

• Real synergies between the master franchisor’s product offering and the South African market exist
• You feel comfortable in your dealings with the master franchisor
• You managed to put adequate financial backing in place
• The master franchise arrangement is structured in such a manner that it offers benefits to both parties

then the acquisition of a master franchise can make perfect commercial sense.