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What does buying a master franchise entail?

Master franchise

What role do you play?

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.

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Costs

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

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Investigate

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 that 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.

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Is it worth your while?

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.

Master Franchise Opportunities