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Master franchising in a new market

By Olivier Bouvier-Johnston
Master franchising is the structure of choice for most international expansions of franchise systems. It provides an opportunity for a brand to grow quickly in a new territory, as it is an adaptation and replica of an already viable system.

It makes sense for franchisors who want to enter a new geographical region to rely on a master franchisee’s local expertise, so as to properly develop their brands in an area that may be quite foreign to them. Operating a business from a distance, after all, can pose many challenges, due to differences in local laws, culture and consumer habits, as well as practical issues like time zones and language barriers.

For these reasons, many foreign franchise systems expanding into Canada have structured their business models through master franchise agreements (MFAs), which dictate key elements of the relationship between franchisor and Canadian master franchisee. The following are some of these elements that need to be considered when negotiating the terms of an MFA.

Preliminary considerations
For a foreign franchisor entering a new territory, there are many advantages to partnering with an international master franchisee, who can help find suitable prospective franchisees, implement local training and monitor day-to-day business activities. The main advantage for the franchisor, however, is gaining access to privileged knowledge of the market in which it is seeking to expand.

The master franchisee will be better-attuned to local consumers and applicable laws and regulations. Given the franchisor will benefit from such knowledge, the master franchising arrangement should (a) help reduce the upfront investment required of the franchisor for the venture and (b) allow for brand recognition to grow rapidly in a foreign territory, a feat that would take much longer otherwise. As such, you as the prospective international master franchisee have leverage when negotiating the terms of the MFA.

Before starting your due diligence, you should prepare a letter of intent, listing your expectations, and the franchisor should be encouraged to do the same. This will often help shorten the negotiation process.

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For foreign franchisors, operating a business from a distance poses many challenges.

Some of the key elements to consider at this stage will include the designated territory for master franchising, the general development schedule, the initial fee, the ongoing royalties (or a formula for establishing them), the term of the agreement and the general confidentiality of the offer and related documents (since many will be shared over the course of the due diligence process).

As with other franchise systems, you should obtain the franchisor’s disclosure document, if there is one, as this can be particularly useful in helping you understand the business and evaluate its potential in a new market. That said, you must be careful when attempting to draw any conclusions from the information provided, as it may vary for different markets. It is a good idea to hire a consultant with relevant industry experience to compare the disclosure document’s estimates of initial investments, sales and profits with the realities of your territory and your projected expansion plan.

When preparing your list of questions for the franchisor, you should also consider any franchise disclosure legislation that has been enacted in the Canadian province(s) where you will be doing business, as this will affect your own disclosure responsibilities to your franchisees. In addition to submitting these questions to the franchisor, you may want to contact other former and current master franchisees and/or area developers around the world to compare answers from different perspectives.

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