HIGH-LEVEL INVESTING
High investment: master franchises and resales
There are other types of high-level investment opportunities in franchising such as buying a resale or taking on a master franchise licence. These bring with them, respectively, established business benefits and scope for growth – they therefore command big-ticket prices.
Breaking new ground – being a master franchisee What is a master franchisee? This is an individual who assumes the rights and obligations of the franchisor in a defined territory, and is the most common in international franchising. They purchase the rights to sell franchises to sub-franchisees, and provide them with some of the services provided by the franchisor. The master franchisee pays the franchisor both initial and ongoing fees based on the number of franchisees operating in the territory. When you buy a master franchise with a view to sub-franchising you are effectively stepping into the role of the franchisor in the new market. A master franchise usually involves a relatively high-level investment. According to franchise consultants Ashtons, the typical initial fee for a master franchise agreement “will be significant, but it should also be commensurate with awareness of the brand within the specified territory, and the size of said territory. You can expect to pay multiple six figures for the rights to become a master franchisee.” As with any venture, you will need to carry out thorough research into the company, its history and successes (and failures), and be certain that you are fit to take on what is effectively the launch of a ‘new’ brand or product in your country.
What you need to know about a master licence: • Are the master licence conditions, the product and the undertaking involved compatible with your investment limitations, experience and goals?
• Ask: is the local market ready for the product or service? You need to be sure that there is a client who wants and, crucially, can afford it. Is it culturally translatable to the nation into which you’re introducing the brand? If it does have potential, is it ready to enter that in terms of protected trademark?
• How well has the company succeeded in its homeland? And what progress has it achieved in other territories it’s expanded into? Why did it work – and what didn’t work – when it came to breaking into a new market?
• You should always seek legal (and, if necessary, financial) advice from a professional with franchise-specific expertise, particularly in international and master licence franchising.
The list above is by no means comprehensive, but one important final point to bear in mind: time can play a huge factor. If you want to be up and running in business sooner rather than later, consider a single-unit franchise from the off. Otherwise, you should exercise caution and remain patient – don’t rush into anything. Make sure you have all the information you need to proceed with confidence. Whenever full information you have asked for is not provided or you are placed under undue pressure to sign an agreement, or indeed if anything else feels in any way suspect – it’s time to cut your losses. Of course, even when you find your perfect match, the process of getting started won’t happen overnight! Nor should it – getting the deal right and legally secure for both sides can take some time.
Investing in a resale There are many franchisees looking to sell their existing business as they may have come to the end of their franchise agreement and decide to put it on the market. As well as all the usual benefits of franchising – training, support, a tried-and-tested model – a resale also comes with an existing client base, an established presence in its territory, revenue and staff (if applicable) from day one. For those very reasons, however, a resale franchise business tends to be at a higher initial cost than buying a new territory with that brand. As the franchise market in the UK matures, resales are becoming
more commonplace and, in fact, some businesses, are offering solely, or in the most part, franchise resales within their network. You may reasonably wonder why an existing business is for sale at all. Well, there are many reasons, including: the franchisee is retiring or relocating; they have other business interests or personal reasons; or perhaps their exit plan from the beginning was always to run it for a specific term and then resell at a profit. All of which means that you too may resell at some point. It’s important to acknowledge within franchising that your working relationship with the franchisor ends after a specified number of contracted years. So from the beginning of your franchise agreement, you will be aware of an endpoint and should bear in mind an exit strategy as you draw closer to it, whether that is to renew the contract or resell.
What you need to know about a franchise resale • It’s not just a straightforward case of buying a business from another person. The franchisor, as well as the franchisee, has to approve of the sale and your relationship to the former is going to be critical.
• What are the franchisor’s expectations of you? This is your chance to gauge whether they are right for you and vice versa. Does the franchisor have a strong track record overall? It’s worth comparing their best- and worst-performing franchises to gauge their success rate. The franchisor should give you a full list of franchisees to contact and speak to.
• Why has the franchisee decided to sell? As detailed above, the reasons can be many, but you should be satisfied that it doesn’t hint at something irreversably negative about the business. Is the franchise business profitable? Obtain information about current financial performance from the franchisee and franchisor. Publicly listed information may also be available.
• What do customers think? Go online for unbiased reviews. Is there an established customer base or are there heaps of complaints? What is the current business plan? Identify how the business operates now and any improvements you could make. Be realistic about its long-term prospects. You could contact industry experts and trade associations to gain key commercial insights. Is it a growth industry or a market nearing saturation? Finally, who are your competitors?
• You should always seek legal (and potentially financial) advice from a professional with franchise-specific expertise.
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BusinessFranchise.com | July/August 2018
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