Friday, 18 June 2021
Choosing a Master
Some of the best-known franchise brands, and nearly every international franchise brand in New Zealand, will actually be master franchisees operating under a master franchise agreement.
The holder of that agreement – the master franchisee, has the rights to operate and develop franchise business units themselves, and or to develop a territory and appoint sub-franchisees under that brand and system. Master franchise agreements can be regional, such as a province, or national.
What are the benefits of purchasing a master?
Acquiring the rights or purchasing a master franchise provides the master with many of the same benefits of buying a franchise system, but usually at only a fraction of the cost of acquisition.
As touched on, many of the masters operating in New Zealand are large, extremely well-known international brands, that in addition to brand power will have proven systems, access to unique products or services.
Two additional and significant benefits of acquiring a master versus developing a franchise are the speed to market and the lower establishment and ongoing development costs.
The franchisor may develop products, services and systems and the master will have access to these as part of their agreement, again most often faster and at a lesser cost than developing themselves.
Are there any drawbacks?
There are a few drawbacks – or I would suggest considerations or limitations – with acquiring and operating a master franchise.
The first and significant limitation that needs to be acknowledged is that the master franchisee does not own the intellectual property. In most cases this will extend to any locally customised or developments to the intellectual property.
There are of course ongoing fees that need to be repatriated to the franchisor. These need to be carefully assessed to ascertain whether the model is sustainable for each of the parties, franchisor, master franchisee and potentially sub-franchisees.
In the case of importing international brands or systems, how appropriate is it for the New Zealand market, is there a consumer demand and will there be demand for sub-franchises?
Lastly, consideration needs to be given to the term or length that the master franchise agreement.
If the master does not have renewal rights they do risk developing and growing a system which ultimately will return to and for the benefit of the franchisor.
Who would a master franchise suit?
Who is likely to acquire a master franchise, and or who is best suited to acquire and operate one?
The first group, and one that we see often in New Zealand are existing franchisors, existing master franchisee and or brand operators.
They understand how to develop and operate brands and systems and they often look towards masters as a way to diversify, take advantage of developing trends or grow their overall business beyond market limitations of the brand(s) they already operate.
The second two groups are less prevalent in the New Zealand market, but I am going to suggest them as the franchise sector develops and matures will increase.
The first of these are existing or experienced franchisees. Usually, they will have operated as multi-site or multi-unit franchisees and are looking at a way to further grow using their experience of operating within the guidelines and provisions of a brand.
Critically different to operating as a franchisee, if they are able to sub-franchise they will benefit from the initial and ongoing fees from the sub-franchisees without having to allocate the resources to developing and operating the business unit.
The last group of potential master franchisees, and again one that we are only just starting to see in the New Zealand franchise sector, is private equity groups.
Private equity groups can be strong candidates as their usual business model is a growth model, they often have well-experienced management and leadership teams and critically they have the capital that is necessary to truly take advantage of and develop using master franchisee rights.