Negotiating the master franchise 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 or ask the master franchisor to accept 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.