Master Franchise Advice
In this section you will find information that covers master and multi-unit franchising. It gives advice on bringing a new franchise into the UK as well as buying into an existing UK franchise as a multi-unit operator. Franchisors can also find out more about the ins and outs of taking their franchise abroad.
The advice examines both concepts - the advantages and disadvantages, what it takes to become a master franchisee, your role as a master or multi-unit franchisee and why multi-unit franchising is becoming so popular.
What is a master franchise?
Master franchises are franchise opportunities that are proven and successful in another country, but have not entered the UK as yet. You as the master franchisee would be bringing the system into the UK and so must evaluate the benefits against the risks carefully.
When you buy a master franchise with a view to sub-franchising you are effectively stepping into the role of the franchisor in the target territory. You will be running two separate businesses, i.e. the core business and the master franchise business, and these will need separate skills and disciplines, so normally separate companies are established.
Should you invest in a master franchise opportunity?
Before investing in a master franchise, like any business opportunity or investment, you need to be certain that becoming a master franchisee is right for you.
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 will need to establish if 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 master franchise agreement.
Terminate negotiations with any foreign franchisor who 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 master 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
Before you go any further, you need to decide whether it is indeed worth your while to invest in the master franchise opportunity. 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.
The role of the master franchisee
By Iain Martin, The Franchising Centre
In effect, a Master Franchisee, especially at country level, will replicate what a franchisor does in their domestic market. In practice, this will include:
- Setting up at least one ‘pilot’ franchise unit to adapt/prove the concept in their territory
- Once proven, set up a franchisee recruitment system (marketing, response handling, etc)
- Recruit 2-3 ‘pilot’ franchisees to test and refine training and support systems – and prove unit economics in other locations.
- Build franchisee network
- Build an appropriate infrastructure for ongoing training, support and communication with franchise network.
- Dependent on the franchise model, the Master Franchisee may also be responsible for national marketing initiatives, including the securing of national accounts on behalf of the network.
When a Master Franchise is awarded, the franchisor provides a business model for both service delivery to the end user, and a model for how to be a successful franchisor. The business model will include all aspects of branding, marketing, training, support, and a management/administrative format.
The Master Franchisee brings local market knowledge, including that relating to local legislation which could be associated with Health & Safety, employment, regulatory issues (dependent on sector), securing property etc; they will also understand local demographics, staff recruitment details – in effect everything that is country-specific, rather than brand-specific. Thus the role is one of partnership, where both parties bring complementary knowledge and expertise to the table, and as a result, the business has the best chance of succeeding in a new country.
Normally, a Master Franchise will enjoy more flexibility in terms of how the business is run, than say a unit franchisee. They will have authority to tailor the brand to the local market (with the approval of the franchisor) – a good example would be in the food sector, where perhaps 10% of a menu is adapted to allow for local preferences.
A strong Master Franchisee will have no hesitation in drawing on the expertise and experience of the franchisor – after all, this is what they have purchased, and if they thought they could do it themselves, why pay licence and royalty fees? The Master should view the franchisor as a resource available to them as required to help ensure success – they should not view the franchisor as ‘Big Brother’ trying to catch them out, or a company that just wants to milk them for as much fee income as possible. If this is the reality, then I would suggest the relationship is unlikely to be long-lasting!
Dependent on the corporate and ownership structure of the business, the Master may have responsibility for managing an exit strategy. This will require the achievement of certain development and financial goals, and identifying an exit route (trade sale, IPO, MBO et al). This is of course the normal point at which the Master can realise a significant capital gain on their initial investment.
Investing in an international franchise brand
The concept of global brands developing a presence in the UK market is something we’ve all grown accustomed to. Global franchise brands are thriving too.
So called ‘master franchises’, where investors buy into an internationally based franchise brand by securing the master license for cthe UK and hence obtaining the rights to set up and develop the franchise in the UK, is growing in popularity.
So what does a master franchisee do?
A critical part of the role is testing the franchise model to see if it is viable in the UK market.
Once it’s clear that the business can succeed, it’s the master franchisee’s role to recruit and train sub franchisees – to run and manage a network of businesses across the country.
What is involved in bringing an established international brand to the UK?
Apart from a huge amount of drive and commitment, for the master franchisee the first vital ingredient is money.
Although franchising can reap rewards, bringing a franchise to the UK and making it succeed is not cheap. Positive cashflow and profits do not come overnight and in the struggle to achieve these, budgeting is everything.
A master franchisee is likely to make most of its money through the sub franchisees ongoing management fees. But these depend on the franchise expanding beyond the first outlet. It could be several years before there is a return on the initial investment and development capital.
Financial challenges for master franchisees
Another expense to the master franchisee is recruitment. Finding sub-franchisees can be costly especially when it is so important only to select those that you are confident can drive the business forward.
Remember that however successful a franchise is on foreign soil, there are no guarantees it will work on your home turf. The key, as always, is painstaking research. Potential investors should hunt for a sound and successful domestic operation and a master franchisor that has the vision and commitment to expand in the UK.
Who are master franchisors looking for?
As for the master franchisor; they should have developed a clear idea of partner they wish to work with to develop their brand overseas. Most will be looking out for someone who can demonstrate a solid business experience and an unblemished track record of success.
But money is important too. The master franchisee will need provide sufficient capital to establish one or possibly more outlets as a way of proving the business model is viable. Only then will the franchise be able to start recruiting sub-franchisees and get going on the road to expansion.
Who can provide financial support?
Banks can support master franchisees develop their franchise plans however they will need invest their own capital and possibly provide security to support any financial commitment they take on with the bank’s support.
Often the issue of culture is overlooked. Globalisation has yet to wipe out the many and varied cultural quirks that make – and divide – nations. There are a vast number of social, technological and economic differences between countries – and getting to grips with these can make the difference between success and failure.
Mistakes made by master franchisees
There are plenty of other mistakes that can cause a master franchise to fail at the first hurdle. A classic error is for a master franchisee to select the wrong master franchise opportunity from the outset – one that just isn’t cut out for success in the UK.
Then there’s the age old failure to commit financial and manpower resources or underestimating the time needed to establish the business. And as I’ve already touched on, a simple lack of research can cause a downfall too.
All of this underlines the importance of seeking the right advice and expert support from organisations such as The British Franchise Association and affiliated professionals such as banks, lawyers and consultants.
Master franchise opportunities aren’t for the faint hearted however they can bring significant advantages for the investor such as an established model that can be adapted to the home market to tap into new or under-utilised business sectors.
Author: Richard heads up the Lloyds Bank franchise team and is a regular contributor to trade publications and national press. Lloyds Bank are affiliate members of the British Franchise Association and proud to support the growth of ethical franchising in the UK.
Why become a master franchise owner
When you consider that the master franchise fee for a whole country for a service-based franchise is often less than the cost of setting up a single unit outlet for some food service or premises-based retail franchises, one can see why more people are thinking "Why should I just become a single unit franchisee when I could be a Master franchisee?"
Of course, the skills required of a Master franchisee are very different, but for someone who is of the mindset of a typical franchisee, i.e. not too entrepreneurial and looking to be part of a proven system with established support structures, master franchising can offer far greater potential than simply running a single franchised outlet.
Becoming the local operation of an overseas franchisor is not just an opportunity for individuals looking to start their own business. Many existing businesses look for opportunities from around the world, particularly those companies who are experienced in a particular field, say food service retailing, who have the operational expertise but perhaps lack the creativity, time or money to develop their own new products or services from scratch.
Potential conversion opportunities
New products for an existing client base or distribution network, or even an opportunity to convert existing stores to a new brand, can quickly transform a business, which has perhaps grown tired.
Potential conversion works to the advantage of both master franchisor and developer as they can more quickly achieve brand awareness than they would opening a store at a time. Having an established network available for conversion is also a good bargaining point for the prospective developer in reducing the up-front fee on the grounds that income flow, from ongoing fees, will grow more quickly.
Trends in the market
An interesting trend around the world is for existing franchisors (or indeed master franchise owners) to be looking for another franchise system to operate alongside their original network.
This often happens if they are nearing capacity, when they basically have two choices - either become an international franchisor themselves, and take their own brand overseas, or start another franchise at home, hopefully gaining some efficiencies from existing support team structures.
Looking at it from the overseas Franchisor's point of view, someone who already has experience of running a franchised network may be a very attractive prospect as a Master Franchisee as they will already have many of the required skills, and maybe even the staff. This means the operation should grow faster than taking on someone with no franchising experience.
Author: Brian Duckett, The Franchising Centre
Questions to ask an international franchisor
Bringing an international franchise to the UK is a huge commitment. You are ultimately trying to replicate the success of the franchise in the UK, and whilst that franchise may be well known in their domestic country, it may not be known in the UK. As financial commitment is usually substantial, it is vital that you know everything about the company, the franchise and the market. We have put together a list of questions you can ask the franchise.
- How established is the company and the franchise? What is the split between company owned and franchise units?
- How many franchisees does the company have domestically and internationally? What countries have you franchised into? How well are franchisees doing? What is the success rate? Reasons for failures? Are many franchisees multi-unit operators? Any disputes and legal cases pending? Has the franchisor adapted their disclosure documents for the UK market? Are the tradename and marks registered for the UK? Are there any legal requirements for entry of the brand in the UK? Will I get assistance with any permits or certificates required to operate in the UK?
- Is the concept transferrable into the UK market - Research, research and research more! What works in one country, may not work in another, no matter how successful the franchise may be. Has the franchisor done their research into the UK? Are you confident that the franchisor has proved the UK is a viable market? Have they modified the operations manual in accordance to their findings? Because, if the concept requires modifying to work in the UK, are the modifications significant to the point of diluting the concept beyond recognition and making the proposition financially unviable and impractical.
- What timeframe does the franchisor have for launching the franchise? And is it realistic? What is the size of your territory? Are the rights granted to you for one unit or one territory or is it for a larger area?
- What will be your role? Are you a sub franchisee of a local Master Franchisee, or will you be the regional or country franchisee with or without the right to sell franchises on?
- Is it a product franchise and if so, what is the supply logistics?
- What is the price parity between UK and domestic markets?
- How long is the franchise contract and is it automatically renewed? What are the termination terms?
- What are the key terms and conditions of the franchise agreement? Are they in line with British Franchise Association Guidelines and does the franchisor buy into BFA code of ethics?
- What initial training and support will you receive? How long is it? Who pays for it? And what ongoing support is available to you? Who delivers the training and support?
- What is fee structure? Are there any hidden costs or fees you have to pay?
Master franchising - things to consider
So what should you look for when considering becoming a Master Franchisee? For the purposes of this exercise we will assume that you have not previously been, or worked for, a franchisor. Both sides should be looking for positive mutual commitment to building a sound business over many years, and this will involve working together with a common-sense approach to financing, training and support.
Unless the Master Franchisor can show evidence of a policy decision to embark on, and properly resource, an international development programme, supported by a detailed business plan, with input from people who know the game, then neither they, nor the potential master franchisee, should go any further.
Something to look for specifically is what basic market research has been done by the Master Franchisor on his product or service in the target country. If none, what makes him think a franchised network can succeed there?
Obviously, even if he has done some, you will need to verify it with some of your own when preparing your business plan, as well as considering the potential differences in key ratios such as property costs, wage rates or petrol prices. You also need to build in some franchising research - how does the franchising market for potential franchisees differ in your country to the Franchisor’s home country, and is the proposed fee structure and rate of franchisee roll-out realistic? What about the costs of franchisee recruitment, or local laws and cultural differences that may affect the operation?
Please note, comparing the population of the USA or Australia with the population of UK, and extrapolating figures there from is NOT market research!
You will also want to know about the Franchisor's track record. If he comes from a country that requires pre-contract disclosure for domestic operations then ask for a copy of the relevant Disclosure Document. Ask for contact details of his other master franchisees so you can ask them about their experiences - and if he doesn't have any others, or won't let you speak to them, consider that carefully in your decision-making process.
Author: Brian Duckett
Other points of consideration
Here are some points to consider before making the decision to buy a Master Franchise:
- Know your responsibilities - As a master franchisee you are responsible for recruiting individual franchisees and for providing support and training on an on-going basis. Are you ready for this?
- Do your research - You need to understand both sides of the equation: the business model and the franchise model. Make sure, for instance, that the business is based on a solid model. Without a viable business model, the master franchise won’t succeed. You will also need to research the market and territory demographics. Make sure that the territory has a population that can support your projected sales and will absorb enough franchisees for you to make money.
- Get off your bottom - Your intelligence gathering must include actual visits to as many franchise locations as possible. If you detect any problems, cross the franchise off your list. Don't be tempted to rationalize the problems away. If you sense trouble, regroup and consider another franchise system.
- Look for the right match - Even if the business model is solid, you'll want to make certain that the franchise suits your investment limitations and your goals. If you don't have the capital, then it's not a good match. If you're not interested in the business, then it's not a good match. Be prepared to walk away if the opportunity doesn't feel right.
- Pick one approach - Becoming a master franchisor versus buying a unit franchise isn't necessarily a better or smarter move. What's important is that you choose either approach for the right reasons and with careful consideration. Running a master franchise requires a different set of skills than owning one franchise. The skills for selling franchises, for instance, are not the same as those needed to operate the business successfully.
- Interview successful master franchisees - If possible, try to talk to other people who own a master franchise in the same system. Find out, for instance, what kinds of challenges they face, what kind of support is available, and if they had to do again, what they would do differently. If speaking with other master franchisees isn't possible, search the Internet, go to the library, and do whatever you can to immerse yourself in the language of a master franchise. The more you know the better off you'll be.
Author: Euan Fraser
Master franchise agreement
A master franchise relationship is where a Franchisor from Territory A (e.g. USA) grants to a master franchisee the right to grant franchises to franchisees within Territory B (e.g. United Kingdom) (i.e. the right to sub-license). In this event the master franchisee is itself a franchisor for Territory B rather than a franchisee.
The franchisor (in Territory A) will train the master franchisee how to carry on the franchising business (e.g. how to recruit franchisees). The franchisor itself may train the franchisees recruited in Territory B by the master franchisee to carry on the franchised business (e.g. selling hamburgers). Alternatively the franchisor may train the master franchisee how to train its own franchisees to carry on the franchised business.
The financial and business structure of a master franchise will typically involve the following:
1) An initial master franchise fee: The amount is for negotiation. Initial master franchise fees range from £1.00 to £1m plus.
2) Monthly master franchise fees: Typically these might involve a sharing with the franchisor of the initial fees paid by franchisees to the master franchisee and of the monthly service fees (e.g. 10% of gross turnover) paid by franchisees to the master franchisee. Again the amounts are for negotiation (and may depend on the size of the initial master franchise fee) and range from 50/50 to nil.
3) So that the master franchisee can be kept on his toes it is usual to provide minimum performance targets. There should be both annual and cumulative targets. There will be provisions for termination or loss of exclusivity if the minimum performance is not reached. Alternatively there may be provisions for the master franchisee to make payments to the franchisor of the same amounts as would have been payable to the franchisor if the minimum performance targets had been met instead of termination or loss of exclusivity.
4) The term of a Master Franchise Agreement is likely to be 10 or 20 years with renewals.
5) It is usual to grant exclusivity within the target Territory.
6) The franchisor is supporting the master franchisee in the master franchisee’s operations as a franchisor. It is up to the master franchisee to support his franchisees in respect of the franchised business.
7) The Master Franchise Agreement should stipulate the form of Franchise Agreement to be used. It will be necessary for a local lawyer to confirm that the Master Franchise Agreement conforms with local law and will be fully enforceable in the target country.
8) It may be necessary to translate the franchisee’s manual. The master franchisee should advise whether any amendments or refinements are necessary to conform with local laws, practices and/or customs.
9) Other usual terms in an Master Franchise Agreement include ongoing support, rights of termination, consequences or termination, choice of law, intellectual property clauses, confidentiality, currency, exchange control (if relevant), sale provisions and internet and intranet clauses.
Author: ©David Bigmore Limited 2010
Master franchise negotiations
The below points will cover negotiating the master franchise deal and will outline what you need to know and do.
- Do not sign any master franchise contract or make any payment until you have fully done your homework.
- Manage the legal process - obtain estimates - control-drafting process - ensure no power shifting.
- Have a franchise lawyer review the disclosure documents and master franchise agreement; choose an experienced lawyer, well versed in licensing agreements.
- Ensure the master franchise agreement clearly sets out the extent of rights to be granted and the territory of exclusivity and the term and renewal issues.
- Ensure the sub-franchise agreement is user-friendly in the target territory and suitably adapted to reflect impinging law.
- Have a franchise accountant view the company's financial disclosures.
- Examine the products, systems, management, purchasing power and marketing on 1 or more visits to the company.
- Take a long-term view - normally it takes more time, effort and money than envisaged.
- Accept that franchisors can rightly seek to make a charge for the granting of rights.
- Ensure performance schedule for development is realistic.
- Insist the best people are available to support the master franchisee.
- Accept the need to invest before expecting to see a return for the new business.
Cost of buying a master franchise
The financial issues of buying a master franchise invariably occupy much time. While there is no set formula for calculating initial and ongoing franchise fees, there are some parameters, which can afford some guidance.
Ensure the initial fees are based on a rational system measuring value and take a long-term view of the potential for the franchise business.
You will tend to incur three sets of costs when becoming a master franchise owner:
- 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
How to calculate the master franchise fees
- Seek maximum flexibility over payment of initial fees
- Agree on appropriate up-front payment.
- Agree an equitable split of continuing fees and/or mark-up from the sale of products or provision of services.
- Take into account the actual cost to the franchisor of dealing with the master franchisee, helping set up the business and assisting in proving the concept.
- Compare the cost to acquire the requisite know-how and skills to operate a similar business in target territory.
- Consider the value of the territory based upon the projected number of units, which could be established.
- Estimate the aggregated amount of initial franchisees, which could be charged by the master franchisee to his sub-franchisees in the development of the network.
Other cost factors to take into account
- Costs of translation/adaptation of manuals
- Costs of local market research
- Cost of negotiating master franchise via correspondent lawyers and other professional fees
- Costs of transportation of material
International franchising models
International franchising is exactly what it says – the further replication of a successful domestic franchised business into a new country.
Over the years, franchisors have adopted various models which have enabled them to enter new markets. In this short article I am going to discuss the four most common models used.
The franchisor grants the Master Franchisee the rights to duplicate its business in a defined region (often an entire country). Essentially, the franchisor is granting the Master Franchisee the rights to use two separate business systems:
1. The system for operating its core service at a unit franchise level (eg how to run a single site coffee and muffins shop)
2. The system for operating its franchise business (ie how to recruit, train, support and motivate franchisees)
Each system should be documented fully, and the Master Franchisee will have a blueprint for how to replicate the franchisor’s success in their own region.
Sometimes some local market adaptation is required (eg. if a food concept, possibly in the menu items offered, or perhaps there are local legislative requirements which affect the concept); however, the franchisor will retain total control of the system and branding, and changes will only be permitted with the franchisor’s approval.
If a Master Franchisee follows best practise guidelines, then they will establish at least one local franchise which they own, prior to awarding franchises to others; the reason for this is that they can then demonstrate to prospective franchisees that the concept works in their country; they understand the business better, and so can provide better support.
In return for the rights, the Master Franchise typically will pay an initial fee for the licence to operate the business in the agreed region for an agreed term. In addition they will pay ongoing fees which are normally linked to turnover, but could be margin on product supplied by the franchisor (eg in the clothing retail sector); they will also pay a percentage of the fees received from sub-franchisees when they join the network.
Master franchising is most commonly used for service-based concepts, and mobile product distribution brands.
The franchisor grants the Area Developer the right to open a number of franchised units in a defined territory; however, sub-franchising is not allowed. The Area developer therefore needs to have the financial capability of funding the establishment of the agreed number of units.
Typically, this type of arrangement is used for retail franchises, where the area developer’s ability to acquire suitable sites is a critical factor for the brand’s success. Sometimes, the franchisor will not operate as a franchise in their domestic market, but only internationally (so in effect, they behave as an area developer themselves in their home country).
The Area Developer will pay a licence fee which is linked to the number of units to which they have committed – normally this will be split, so that a portion is paid initially to secure the ‘area’, and an additional fee is paid each time a new unit is opened. Ongoing fees will be linked either to total revenues in the territory, or as margin on products supplied.
Area Development can be attractive where margins are tight, since there is no ‘intermediate’ level in the vertical structure of the relationship – ie franchisor – area developer – customer (compared to master franchising where the relationships would be: franchisor – master franchisee – franchisee – customer).
Under this arrangement, a franchisor will grant rights to a unit franchisee directly – and will provide training and support in exactly the same way that they do in their home market.
Sometimes such support is provided directly from the home market, but often, the franchisor will establish a base in the international market – clearly this will depend on the logistics associated with fulfilling the franchisor’s commercial obligations to the franchisee. If the market is physically very close (eg UK to Republic of Ireland), this arrangement could work effectively; however, if the franchisor is located thousands of miles away, and in a very different time-zone (eg UK-Australia), this may be less practical.
The other advantage of establishing a base in the international market, is that the franchisor can test/adapt their concept for that market prior to offering it as a franchise – and because it is more ‘proven’ it will be more attractive commercially to prospective franchisees. The downside for the franchisor is that this approach does require a far higher level of financial commitment, which is why many will try to secure franchisees directly, without having ‘piloted’ the concept themselves.
The fee structure will be as for a domestic franchisee – but there may be a higher cost associated with training, if that is to be handled at the franchisor’s head office. So an initial franchise fee, and an ongoing management service fee.
The franchisor will typically seek a local partner with complementary knowledge to that of the franchisor – if say, a casual dining concept, they would seek a successful operator of an existing casual dining restaurant chain.
The commercial arrangement can vary, but would normally involve the establishment of a new company which is jointly owned by the JV partners. The units are then rolled out either as company-owned businesses, or as sub-franchises.
Funding for the business would be agreed on the basis of what each is bringing to the table – expertise and knowledge has real value, as does ‘sweat’ – actually running the business. Clearly, this can only be determined once there is an agreed business plan.
In most JV arrangements, each party will have the opportunity to buy out the other in the event of certain things occurring – on an agreed basis. Many franchise professionals are sceptical about JV’s, since its difficult for the franchisor to know what’s happening ‘on the ground’, and so distrust/bad feeling can arise. If this model is used, its probably best to have a clear view on the exit strategy for both partners.
Each of these development models has its own advantages and disadvantages – there is definitely not ‘one size that fits all situations’ – which is why many franchisors who have a presence in a number of countries, will use different models dependent on the local situation, and the strategic importance of a country to them. In the best franchise relationships, there is transparency, and the motivation of each party to an agreement is very clear – this is especially true in international franchising.
Author: Iain Martin, October 2013
Expand the brand: overseas growth
A commonly misunderstood aspect of franchising is thinking that setting up a franchise is cheap and easy. This is far from the truth if done properly of course, with many considerations requiring serious attention before launch.
If all of the appropriate expertise has been sought and the right systems are put in place, the business can recruit new people to join the franchise; using their money to further expand the brand and drive it to the end user in their area. This combination of national support and cost saving, combined with local enterprising franchise owners can provide a very robust and successful formula even in a market where conditions are tough.
Questions to consider
When you start to look to foreign shores, you need to reconsider the set-up again. Many businesses you see every day, including many high street brands, use franchising as a way of expanding their operation overseas, but this does open up new questions.
Does the new market have a need for your products? Do local laws cause any infringements on your business? How much does your franchise agreement need to change? Do employment laws and practices cause problems? What are the key cultural differences in your new target market? There are numerous considerations to make and options available, so research and professional advice is essential.
Branding is one particular area of research that is paramount, as the market and law may accept the product and business model, but if the brand doesn’t fit, then all of your hard work could be undone.
Some brands have worked very well across many different markets and cultures and continue to grow, but there have also been many occasions in business where a product is introduced to a market only to be ignored, laughed at, or worse: put in front of the courts.
I think we have all seen the joke emails that circulate and TV programmes where one word in one language means something altogether different in another!
This aspect of branding suitability can make the difference between success and failure in franchising. Yes, people are buying a proven business model, training, support and knowledge, but the brand ties it together. It is the promise that the customer receives about the company. If this doesn’t hold any value, then people will have little interest in using their money to join the network and further expand the brand.
Three aims to fultil for expansion
If successful, in either expanding on home turf or abroad, then the franchisor (the owner of the brand and system) has three main tasks: Secure and develop the brand and system; support existing franchisees; and recruit new franchisees to further grow the network.
Although the third is not essential, the first two are. To truly expand the brand and further grow the business through franchising, solid support and encouragement is required for the franchisee network. They not only need to retain their enthusiasm, but they need to remain bought into the brand.
The phrase “living the brand” maybe seen by some as rather over-the-top, but it is invaluable in franchising. The entire network needs to understand and openly promote the service, values and quality that your brand communicates. This requires constant attention and investment. The network needs to realise their value and the individuals need to be recognised for their achievements. However, they obviously have a large part to play in this themselves, as the agreement is for them to work hard at making the business grow and prosper. Naturally this should generate its own reward in the form of revenue and security.
Benefits of franchising
Franchising remains one of the most effective ways of expanding a business, both nationally and internationally. It develops a new level of robustness to the business and helps secure its future and the futures of the many small business owners that make up the network – but only if done well!
To get the right advice and support from professionals such as banks, solicitors, accountants and franchise consultants, look for those that are bfa-accredited; they have demonstrated an intimate knowledge and expertise of all things franchising, and are the people that really understand the intricacies of setting up a franchise correctly according to the European Code of Ethics.
The bfa continues to promote and accredit excellence in franchising, with franchisor members and affiliated professional advisors having to pass ethical checks on their businesses. Retaining the professionalism and quality in franchising continually helps to provide new business and employment opportunities every year.
How to find the ideal Master Franchisee for your franchise
I’m not a fisherman, but I understand that if you want to catch a particular type of fish, you need to know where they swim, and use the right kind of bait to ‘hook’ them. Securing a master franchisee requires a similar strategy!
Master Franchisee Profile
Your starting point is identifying the essential and desirable attributes of your prospective Master Franchisee – essential attributes will include financial capability, possibly past experience of building a national organisation, maybe vertical market experience – these will vary from concept to concept. Desirable attributes might include experience in franchising, or possibly even owning a current Master Franchise for a non-competing brand.
Finding Master Franchise Candidates
Once you know what your ‘fish’ looks like, you can determine where to find it, and work out a strategy accordingly. For example, if you would like someone with a track record of having built a successful franchise network under a master franchise agreement, it’s a relatively simple matter to find the contact details of the key people.
You are likely to need to develop both a pro-active strategy for reaching suitable individuals/organisations (Linkedin can work well), as well as a more general ‘attraction’ marketing approach – which magazines/websites etc is your target likely to view? Are there niche publications/platforms which may be relevant? Do they have databases of potential candidates?
Telling your story
This is a critical area – if you haven’t thought through how you’re going to tell your story, and the messages you want the candidate to receive, chances are that he’ll ‘get off the hook’!
In reality, your preparation for entering a new country begins a long time before you start promoting the availability of a country licence. Areas that should get a big ‘tick’:
- Is your domestic system working well?
- Unit economics of franchisees?
- Positive relationship with franchisees – no serious litigation etc
- Length of time you have been trading as a franchisor
- Status of your domestic market penetration?
- Do you know why you want to enter a particular international market?
- Do you have an international development strategy?
- Why the country in question?
- Do you have a properly funded development plan?
- Have you prepared all of your marketing collateral?
- If you don’t have any Master Franchisees at present, have you thought through:
- How you will provide training and on-going support to your new Master
- Are you convinced your concept will transfer successfully?
- Have you commissioned any market research in the target country? This will be a powerful demonstration of your commitment to that market in the eyes of your candidates.
Present a structured process
Once a potential candidate makes contact with you, you should have a clear and structured process for the information exchange which will ensue – and one indicator of a candidate’s willingness to adhere to your franchise system, will be their willingness to follow the process you have designed!
Your process will include how and when you provide information to the candidate, and how and when they provide information to you – this will depend to a large extent on how well known your brand is in the target country – if there is little market awareness, then you will need to do more early on to demonstrate your USP’s/benefits to the candidate; if your brand is well-known (eg Burger King entering a new country), then you’re in a much better position to ask the candidate to provide full disclosure of their background/circumstances at an early stage.
Elements in this exchange normally comprise the following: provision of written/printed information, telephone conversations (often Skype), face-to-face meetings. The exact design of the system will reflect the specific attributes of that brand.
A lot of time & effort is required to become a skilled fisherman – and coaching can accelerate your development – the same is true in Master Franchise recruitment – there is expertise available for those who are ready to take it on board.
Author: Iain Martin, The Franchising Centre
Legalities of franchising in the UK: what international franchisors need to know
This article considers some of key legal issues which international franchisors should bear in mind when expanding into the UK.
Since the 1960s when the very first franchise networks, such as Dyno-Rod, were launched in the United Kingdom ("UK"), franchising has taken root and flourished as an effective technique for expanding businesses in the UK, across a variety of sectors.
The franchising industry continued to grow despite the global economic crisis in 2008 and the conditions for the rest of the UK economy are now looking positive.
For any successful international business, expansion into the UK is a logical next step, offering exciting new business opportunities and growth potential. For international businesses based outside of the European Union ("EU"), the UK is often chosen as a base from which to establish a "beach head" before further expansion across the EU.
There are a number of factors which explain why the UK is an attractive market for international businesses, including the UK's reputation as a lightly regulated place in which to do business, the emergence of the English language as a truly global language, London's status as one of the leading capital cities in the world and access to the City of London's capital markets.
The UK as a legal jurisdiction
A common misunderstanding about doing business in the UK is that it has a single legal system.
The UK was created by the political union of previously independent countries and there are three distinct legal systems; English law, which applies in England and Wales, Northern Irish law, which applies in Northern Ireland, and Scots law, which applies in Scotland.
While England and Wales, Northern Ireland, and Scotland diverge in the more detailed rules of common law and equity, and while there are certain fields of legislative competence devolved in Northern Ireland, Scotland, Wales and London, there are substantive fields of law which apply across the UK. This article will consider legal issues from the perspective of English law.
The UK's relationship with the EU
Another common misunderstanding is that the EU is a genuine single market with a close to fully harmonised legal system.
The EU is a union of 28 different member countries (called “Member States”), that share common political, economic and social objectives. The EU promotes the free movement of goods, services and workers and operates a ‘harmonized’ legal regime designed to ensure consistency between Member States’ laws.
However, significant differences remain between the national legal, regulatory and cultural regimes of individual Member States that prove challenging to businesses entering the EU market. In addition, some EMEA countries often considered “European” (like Switzerland and Russia) actually sit outside the EU and are subject to wholly independent national regimes.
Therefore, whilst a legally compliant English law franchise agreement will, by its very nature, incorporate a number of EU legal principles (see below for more information on Competition Law), if it is to be used in other Member States, it should still be reviewed for its compliance with the mandatory local laws of the relevant Member State, which may conflict with the position under English law.
The regulation of franchising in the UK and the EU
The disparity between the legal systems of Member States applies to franchising. Various Member States have franchise specific regulations requiring, for example, franchisors to register with the authorities and/or issue a pre-contractual disclosure document to prospective franchisees.
The courts in some Member States do not always recognise the difference between a commercial agent and a franchisee. By applying commercial agency laws by analogy, franchisees in certain Member States have been able to successfully claim compensation at the expiry of a franchise agreement.
Some Members States are civil law jurisdictions, such as Germany, and have a codified duty of good faith, which applies to all elements of the franchise relationship. This can impact on a franchisor's contractual discretion and its ability to take unilateral decisions on behalf of the network.
There is no analogous legislation in the UK requiring registration of franchise agreements or pre-contractual disclosure, nor do the English courts confuse franchisees for agents. There is no general duty of good faith under English law which applies to franchising, although some recent court judgments indicate that English law may be starting to move in the same direction as some of its European cousins. Nevertheless, English law remains an attractive choice of law for international franchisors wishing to do business in the UK and the wider EU.
The British Franchise Association ("BFA") is a trade association which promotes ethical franchising in the UK. The BFA's "Code of Ethics", which not legally binding but which its members must abide by, provides a benchmark for good industry practice in relation to issues such as advertising, recruitment, the exercise of fairness throughout the franchise relationship and dispute resolution.
Structuring the franchise business
At a very early stage, the franchisor will need to decide which entity or structure will best fit its needs and expansion plans. This will depend on factors such as the revenue model, tax profile, ease of raising debt and equity finance, and the commercial strategy at both a Member State and a European level.
In particular, businesses launching into the UK may intend to operate corporately owned outlets as well as franchised outlets and/or provide "on the ground" support to its franchise network, in which case a launch may or may not be best achieved through the creation of a new vehicle, acquisition of an already established local business or purely on an arm's length basis.
Foreign ownership and investment in the UK is subject to very few regulations. The UK Trade and Investment government agency exists to assist foreign businesses to invest in and move to the UK. There are no general restrictions on foreign ownership of UK assets or companies. All new companies must register with Companies House, the registrar for companies in the UK, and will be subject to official requirements, such as the filing of annual accounts.
UK employment contracts are subject to a number of statutory protections for employees. Many derive from EU-wide laws affecting the employment relationship which are designed to harmonize employment rights across the EU. Critical employee considerations include impact of local tax regimes on employee stock options, Works’ Council establishment, talent availability, and transferring employment rights for employees acquired in a business sale context (TUPE).
Protecting the brand
Each Member State has its own IP regime, as well as being subject to EU law and international treaties.
Trade marks and design rights can be registered through the UK Intellectual Property Office (IPO) or alternatively an application for a Community Trade Mark ("CTM") or design right could be filed with the Office for Harmonisation in the Internal Market ("OHIM") and which would provide protection in all 28 Member States. If the franchisor already has marks registered in other jurisdictions which are party to the Madrid Protocol, it may be possible to add the UK to the international registration by application to the World Intellectual Property Organization ("WIPO").
Other key IP issues include the protection of copyright (which is not a registrable right in the UK) in materials such as the franchise manual and the acquisition of employee, franchisee and consultant-generated IP (which is typically achieved by contract) and strategies to guard against counterfeiting.
Franchise agreements can affect competition between either Member States (in which case the European Commission ("EC") may take enforcement action against an offending party) or at a national level (and in the case of the UK, the Office of Fair Trading), particularly if they contain location restrictions and pricing obligations.
This is a complex area of law and penalties for breaches can be severe (including unenforceability of agreements and/or fines expressed as a percentage of global turnover), which is why specialist competition lawyers who understand franchising should be consulted.
The key competition law issues in the context of franchising are:
Pricing controls – it is not possible to require franchisees to sell products and/or services at set or minimum prices. However, there is some scope for short term price promotions and restrictions on excessive prices.
Exclusivity – it is possible to grant exclusivity to a franchisee to operate a franchise in a Member State or within a defined territory within a Member State. However, the "exclusivity" granted can prevent a franchisee from "actively" selling into another reserved territory, but it must not prevent the franchisee from accepting "passive sales" which may originate from outside of its exclusive territory.
The Internet – the EC treats almost all business related online activity as "passive selling" and therefore it is not possible to prevent a franchisee from promoting and/or selling its products/services online. A franchisor can impose certain quality criteria but for multi-channel franchisors (particularly those in the retail sector), this poses a significant problem to franchisors who wish to reserve the internet to themselves.
Exclusive supply and other non-compete obligations – it is possible to both restrict a franchisee from being involved in a competing business during the term of the franchise relationship and oblige a franchisee to purchase a certain amount of the franchise related products from the franchisor, provided that the term of the franchise agreement is for no more than 5 years in duration.
A franchisor can impose stricter and longer obligations where it owns the premises from which the franchisee operates, which is why, in part, a number of franchisors, particularly in the quick service F&B sector, act as landlords to their franchisees. It is possible to impose enforceable non-compete obligations on a franchisee after the expiry of a franchisee agreement, provided that they are carefully drafted and are necessary to protect the franchisor's legitimate business interests and know how.
Other laws affecting franchising in the UK
The Fair Trading Act 1973 and the Trading Schemes Act 1996, regulate ‘pyramid selling’ schemes in the UK, and can apply to poorly drafted franchise arrangements, in particular those which involve sub-franchising, independent sub-contractors, or other multi-tier structures. It is important to ensure that the franchise comes within one of the exemption criteria; otherwise a franchisor may find that its agreements are unenforceable or worse, its directors and officers could face criminal liability.
The Bribery Act 2010 has created one of the strictest anti-corruption regimes in the world (even in comparison to the US Foreign and Corrupt Practices Act), including a corporate offence of failure to prevent bribery. It is a strict liability offence for which companies face an unlimited fine if found guilty. Individuals found guilty of involvement in bribery face a maximum penalty of 10 years imprisonment. An offence would be committed by a commercial organisation when a person performing services on its behalf bribes another person and intends to obtain or retain business for it.
The Act has not yet been tested in relation to its applicability to the franchisor/franchisee relationship. Whether it does apply will turn on the degree of control that the franchisor has over the franchisee, and the degree of benefit that the franchisee's activities confer on the franchisor. It is important, therefore, that international franchisors protect themselves to the greatest extent possible and ensure that they have "adequate measures" in place to prevent bribery in their franchise networks.
The EU has the strictest data protection regime in the world. Complex rules govern every aspect of the data lifecycle, impacting when and how businesses can send marketing, use website cookies and collect, store and transfer personal data. This is particularly relevant for consumer facing franchise businesses, where a franchisee is often collecting customer data and processing it on behalf of its franchisor, who ultimately controls and owns that data. Setting up or operating in the wrong way can degrade the value of this vital business asset, cause serious damage to the brand and run the risk of incurring substantial fines from the regulators, both in the UK at an EU level.
It is extremely important that franchisors looking to do business in the UK invest properly in taking legal advice from a lawyer specialising in franchising to ensure that their business operations and franchisee agreements are legally compliant.
Understanding the risks and issues and managing those risks through effective structuring and enforceable legal contracts will enable international franchisors to reap the rewards of doing business in one of Europe's largest and most dynamic markets.
Author: Gordon Drakes is a commercial lawyer at the law firm, Fieldfisher and he specialises in franchising and multi-channel licensing. Fieldfisher's franchising practice is rated as the leading practice in the UK and globally by Chambers & Partners 2014 and Chambers Global 2014 respectively.
10 keys points to consider when taking your franchise brand international
Below is a list of points that franchisors should consider when looking to franchise internationally to help them avoid making mistakes at a later date:
1. Perfect your concept before you go abroad
2. Get all your documentation up to date and be prepared to adapt it to the new country
3. Don’t over extend yourself - do only one country at a time
4. Common language is a huge benefit
5. Research the local market and the locals know better - even raw materials are different from country to country
6. Budget accurately and allocate costs correctly - setting up a master franchise properly is expensive
7. The correct master franchisee is essential not just the personality but do they have sufficient capital - strict guidance and control is needed in the beginning
8. Training is an essential part of success – even to extend the company culture
9. Ensure good marketing
10. Under promise and over deliver - it’s difficult to keep the master franchisee motivated
Protecting and getting the most from customer data - a key asset for franchising growth
Fieldfisher LLP is a technology and IP driven law firm with a leading global practice in Franchising and Privacy Law. In this article, Gordon Drakes considers how franchisors can get ahead of the game through compliance with data protection rules.
Increasingly in the future, when an international franchising business is asked to identify its most valuable asset it may well point to its customer data. The inexhaustible developments in technology and the rise of technology for the masses has meant that a business now has access in a way never before seen to information about how its customers tick.
Whereas before, a business might run a marketing campaign based on focus group feedback, now it can target its marketing based on how individuals visit its website, use its app (on tablets as well as smartphones), as well as how they rate and recommend it on social media. And a business can perform this analysis for customer interactions on staggering amounts of data.
The world markets have opened up and franchisors have looked to internationalise by exploring new territories, frequently in the Far East. The opening up of certain 'gold mine' territories (such as China) to franchisors offers the promise of substantial growth.
In many of those territories, major franchisors' brands are already widely known so there is already an engaged customer base. In other territories and for many brands, it will take more time to build up a loyal customer base and franchisors may look to social media and their online presence to generate interest and gauge reaction. And in the offline world, franchisors will increasingly want to provide the same in-store experience to a loyal customer whether that customer is in a franchisee store in Manchester or Moscow.
Franchisors who can deliver a seamless service where customers feel special and their needs anticipated based on astute data marketing and analysis can reap a massive loyalty reward: effective use of customer data can exploit the personalised offline experience in an online setting. It can enable franchisors to respond quicker to customer trends and develop an integrated approach to marketing and brand building campaigns.
Franchisors who embrace this approach should ensure that teams are structured around the customer and not just the channel thus ensuring a more integrated collaboration between the corporately owned business and franchise owned business.
Data protection rules on a global stage
Any handling of customer data is likely to trigger the application of data protection and privacy rules. Issues of "intrusiveness" and data security concerns have led to more and more countries legislating for data protection.
So, for instance, in recent months Singapore and South Africa have both passed data protection laws. However, the standard that remains the strictest is that set out in the EU Data Protection Directive 95/46. And as those who have dealt with the EU Directive before will know, there are restrictions on the transfer of personal data outside the EU.
This restriction can be perplexing for international businesses keen to push into new geographies such as the EU. However, there are ways of meeting the data transfer compliance requirements such as through the comparatively new innovation of "Binding Corporate Rules" which a number of truly global companies have now adopted, including, for obvious reasons, a major international hotel group.
What makes the Binding Corporate Rules solution so unique is that it puts in place a framework for global data protection compliance inside a multi-national organisation which is consistent, even though it crosses borders, and so builds trust – it is not just concerned with the technical requirement to legitimately transfer personal data.
Being "joined up" and consistent is also becoming more necessary than ever before, particularly given the risk of brand damage and new legal liabilities emerging under new legislation. Customers could take fright and opt out in droves, depriving franchisors of the ability to mine and exploit these new communications channels. Getting this right will soon be seen as absolutely essential for consumer facing brands in most sectors, and not just the obvious ones.
Gaining customers – building trust
Compliance with data protection rules, which may have been seen in the past as an obstructive, legalistic requirement, can actually be central to building trust and loyalty with individual customers.
An individual who understands how their personal data is being used and has an element of choice about how it is used is much more likely to share their data with an organisation than not.
On the other hand, these days, because of greater consumer awareness and concern about the potential abuse of their data, an organisation that is cagey about its collection and use of personal data or gives individuals little choice may well lose customers. In a technology driven age where more people are aware of their privacy rights, a brand that demonstrates that it 'gets' privacy will steal a march on its competitors.
Who must comply with data protection rules?
Within the EU, the current law places compliance obligations on data controllers – those organisations that make decisions about personal data collection and use. A data controller may engage service providers (known as data processors) to carry out some of the data processing on its behalf but ultimately it is the data controller who is responsible.
Data controllers have quasi-ownership rights over the personal data collected so it is really important in any franchise relationship to establish who the data controller is, and if there is more than one. For instance, the franchisor will nearly always be the data controller of customer data but a franchisee may be either a data controller or a data processor depending on the arrangement the parties enter into.
Usually the franchisor and the franchisee are independent data controllers i.e. they both have rights to access and use the personal data but for their own separate purposes. A franchisee may be a data controller of customer personal data even if the franchisor lays claim to intellectual property rights in the data. The important thing is to ensure that the parties are agreed on what their roles are and that, to the extent possible, this is documented in the contract.
What does data protection compliance look like?
EU law will apply to organisations that are established on a territory in the EU i.e. operate a business, branch or subsidiary including a franchise, and collect customer data.
The organisation caught by EU law will need to put in place processes that meet the requirements of local law including registering with the local data protection authority, providing notices to individuals, obtaining marketing consents, granting access to data, ensuring appropriate data retention and data security etc.
Certain EU jurisdictions have slightly more prescriptive rules in some areas – for instance, Spanish law sets out very specific requirements on data security. In particular, franchisees and franchisors will want to understand the rules around marketing and how they can best use technology to connect with their audiences.
A franchisor will also need to think through its strategy of how it manages franchisees and, in particular, what rights it has over the customer data the franchisee holds. If a franchisor wants a right to control the e-marketing campaigns to all customers, its franchisees are likely to be required to share access to customer databases with it as a matter of course.
If that is the case, the parties will need to think carefully about what customer consents are required. Alternatively, a franchisee may want a certain amount of discretion to run local marketing campaigns which are suitable to the specific territory e.g. a promotion for Chinese New Year or similar.
While perhaps not an issue to dwell on at the beginning of a franchising relationship, the franchisor will also need to consider what happens to customer data where one party breaches the franchising agreement so that it terminates, when the franchising agreement expires, or if the franchisor or franchisee is acquired by a third party.
A franchisor will usually want to ensure that a former franchisee cannot compete in the market with the new franchisee and so will want a mechanism in the franchise agreement to regulate the on-going rights to use, and the obligation not to use, customer data. Competition laws will need to be taken into account in ensuring the effectiveness of such restrictions.
The success of various loyalty schemes has highlighted the fact that people are prepared to give away access to much of their data if they receive a benefit in return.
Loyalty schemes are not in themselves a new phenomenon. But new technology has given companies much greater access to information about customer behaviour and preferences. Franchisors and franchisees can take advantage of the new insights obtained through "mining the data" captured by loyalty schemes to get to know their customers and provide them with benefits which keep them loyal.
It is significant that the company behind one of the most successful UK loyalty schemes, Aimia that runs the Nectar card programme, developed a set of data values (known as Transparency, Added value, Control and Trust) that places consumers at the heart of their data management activities. Good privacy practices can enhance trust and brand recognition for franchisors. And of course the deeper the relationship that the franchisor builds with its customers, the greater the rewards.
Now more than even before, a franchisor has the opportunity to engage with customers across a variety of channels. Franchisors will be keen to ensure that, as they expand, their online presence remains consistent and 'on message'.
But websites that target particular geographies (by, for instance, providing web pages in the local language or local currency) should increasingly think about compliance with local data protection requirements. So, for instance, it may be that the privacy notice on the website needs to be amended to comply with local law. Likewise franchisors will need to think through what happens to the customer data collected through that website.
Will it share it with the local franchisee or franchisees so that they can target the customer? If so, does it need to obtain customer consent to do so? Of course, a franchisor could choose to give its franchisees the freedom to modify the relevant web pages to reflect the local market. There is emerging evidence that this is a particularly successful model although franchisors will still ultimately want a significant degree of control over how the country franchisee runs the content and engages with customers.
Privacy and data protection rules are still adjusting to the rapid growth of apps but this will continue to become an extremely popular way for individuals to purchase goods in the future – witness the huge success of the Domino's Pizza app. Tech-savvy consumers (especially the youth market) will expect to be able to interact with their favourite brands from their smartphone or tablet. Franchisors that can spot how best to engage with customers through technology have the potential to gain the most.
Customer data in the cloud
It's no surprise that a number of drivers have led companies to use cloud services to store their customer data.
The drive to reduce costs and the need for greater data security resilience (typically found in highly sophisticated tech companies offering cloud services) are just two factors that have encouraged businesses to move to cloud services. So all franchisors (whether those operating global businesses or tech-savvy domestic businesses) which involve the collection and analysis of customer data are likely to consider storing data in the cloud.
Where the customer data is subject to EU data protection rules, franchisors will need to think about how to meet their obligations and reduce the risk of non-compliance. Many if not most of the big cloud players are based in the US and have so-called "Safe Harbor" status allowing EU data to be transferred to their companies in the US, although a number also now have clouds limited to the EU only.
Franchisors engaging cloud providers should ensure that the contract provides sufficient reassurances about data security and access to the data particularly if franchisees will be given some level of data access.
Data protection – a helping hand to increase customer trust and interaction
Although there will be some sceptics due to the bad press data protection has received in the past, good data protection compliance when used together with the other emerging technologies and customer engagement techniques such as social media and the emerging messaging technologies, can be a real enabler for businesses by increasing customer trust and encouraging interaction.
This can help franchisors and franchisees know more about their customers and so open up new and enhanced marketing strategies. The spread of privacy and data protection rules globally and the likely adoption of a new data protection regulation in the EU soon will again emphasise the need for businesses to comply. But compliance shouldn't be seen as a drawback but rather as a means of exploiting customer data in the most effective way possible.
However, a failure to take data protection compliance seriously can result in serious fall out for companies whether that be in a loss of reputation, compensation claims or regulator fines. A number of major UK companies have learnt this to their cost when their non-compliance with the rules has become public. It is likely to be only a question of time before a franchisor and its brand is similarly caught out.
Author: Gordon Drakes, Fieldfisher LLP
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What is multi-unit franchising?
There are two main types of multi-unit franchising. The first is sequential (or incremental) multi-unit franchising, whereby franchisees begin with one unit and gradually purchase additional units over time. Franchisees usually must display competence in operating their current unit(s) before the franchisor will entrust them with additional outlets.
Sequential multi-unit franchising benefits both franchisor and franchisee: selecting an existing franchisee to establish a new unit removes the difficult and often costly process of finding high-quality, reliable new franchisees; and the franchisee is rewarded for their hard work with additional units and, in turn, the opportunity to increase their revenue.
The second multi-unit franchise model is Area Development, which involves the franchisor granting the franchisee the rights to an exclusive territory where they will be expected to establish a specified number of units within a certain timeframe. The predetermined nature of area development agreements typically means that franchisees will own a larger number of units under this system than with sequential multi-unit franchising. The area developer will pay the franchisor a development fee for the exclusive rights to their territory as well as a franchise fee each time a subsequent unit is opened; however, they are typically rewarded for their success in expanding the brand with financial incentives such as reduced fees.
Benefits to Franchisees
Although being a multi-unit franchise operator is undeniably challenging, owning more than one outlet provides a number of advantages to franchisees. These include, but are by no means limited to:
- Greater earning potential: an obvious benefit of owning multiple units of a franchise is the potential to earn considerably more money than can be earned from owning just one, and the greater the number of units a franchisee owns, the more profit they can potentially generate. This also offers franchisees added security – if one of their units underperforms, this can be compensated for by higher sales in other units.
- Lower costs: franchisees operating multiple units will save money in several areas of their business. Not only will they have the advantage of financial incentives provided by the franchisor e.g. discounts on fees and royalties, but they will get more for their money than single-unit operators in other vital areas such as marketing, paying the same amount to advertise multiple units as they would pay for only one.
- Staffing efficiency: for single-unit operators with only a small team of staff, unexpected absences can cause a great deal of difficulty and stress. Multi-unit franchisees benefit from having access to a larger pool of staff, making it easier to find cover in case of absences. This has the added bonus of allowing staff more flexibility when choosing holiday time and annual leave, resulting in happier employees.
Benefits to Franchisors
The increasing popularity of multi-unit franchising has been in no small part due to the large number of benefits it provides to franchisors. These include:
- Less training required: when each new unit is opened by a different franchisee, each of these individuals will have to be given in-depth and time-consuming training to ensure they are properly equipped to operate their new business. However, if one franchisee operates multiple units, only one initial training course is required for several outlets, saving the franchisor a considerable amount of time and money.
- Lower risk of adverse selection: if a franchisor chooses to grant additional units to an existing franchisee who they know to be reliable and efficient, they avoid the potential pitfalls of selecting franchisees who they have had no previous dealings with and who may ultimately prove to be ineffective in running their business.
- Faster growth of the business: as a result of the time saved on essential processes such as recruiting, screening and training of multiple new franchisees for each unit, multi-unit franchising allows a business to expand much more rapidly, leading to greater brand awareness and higher profits.
Things to consider
While multi-unit franchising clearly has a wide range of advantages for everyone involved, like any business venture, it can pose difficulties which people entering the world of multi-unit franchising should be aware of, such as:
- Greater responsibility: it goes without saying that owning a large number of units is more demanding than owning just one. Multi-unit franchisees must ensure the smooth running of numerous outlets, effectively acting as a mini-franchisor monitoring the performance of several store managers. This may lead to great stress and anxiety in some franchisees, and it may be difficult to find a healthy work/life balance when operating multiple outlets.
- Risk of oversaturation: as multi-unit franchisees will typically be expanding their business within a relatively small geographical area, it is important that they thoroughly research the market before opening additional outlets or signing an area development agreement to ensure that they do not oversaturate the area and put their financial success at risk as a result.
- Greater detachment: some argue that, as the number of outlets owned by a franchisee grows, so too does their level of detachment from the operation of their units. This is a potential drawback both for franchisees, who may wish to take a more hands-on approach in the day-to-day operation of their business, and franchisors, who may find that owner-operators with a large number of units become less efficient in creating profit for the company.
Multi-unit & multi-brand franchisees – A bright future for UK franchising?
By Dr Mark Abell and Shelley Nadler Bird & Bird
Multi-unit / multi-brand franchisees have long been a feature of the US franchise market, a great many of this have become hugely wealthy and some have even floated. Without them the US franchise market could not have expanded as it has done. These exciting new large-scale franchisees have started to emerge in the UK Although the master franchisee/owner operator franchisee model of franchising has a role in franchising in the UK, many are beginning to realise that it has a number of severe limitations and that franchisors looking to launch their brands in the UK should be looking to engage with successful multi-unit franchisees.
Through the emergence of successful multi-unit / multi-brand franchisees in brands such as Costa, Domino’s and KFC a key resource has evolved. Due to market saturation and hence a lack of opportunity for further significant expansion within their current brands, these multi-unit operators can be usefully exploited by other franchised brands looking to “turbo-charge” their growth within the UK.
Who are these multi-unit / multi-brand franchisees?
Typically, these multi-unit/multi-brand operators are individuals who, through years of operating well developed franchise concepts, have developed a strong set of operational skills together with an effective operational and managerial infra-structure. Many of them have professional backgrounds as accountants, lawyers or MBA graduates. They have applied their professional training and rigour to the effective implementation of their chosen concepts (often fast food and coffee shops), whilst at the same time taking a bigger picture and strategic view as regards the structuring, financing and growth horizons of their business.
Often they acquire their first franchise at a young age and this is usually in the food and beverage sector. These operators are good negotiators and have a history of finding securing good locations at competitive rents. They also understand how to motivate and retain good quality staff which ensures that standards are maintained for stores whether they are operating one or fifty. Many multi-unit / multi-brand operators have invested heavily in real estate and worked strategically to build a portfolio of brands that can occupy adjoining sites in a hub type structure. These operators know how to keep costs down by sharing resources. Importantly, these operators all have access to substantial capital that is available to invest in appropriate projects.
Once established as a multiple franchisee with one brand the multi-unit franchisee typically switches to a non-competing brand to spread the risk. Lessons have been learnt following the BSE crisis in the 1990's when sales of burgers plummeted that it is good to own more than one type of food concept. The same could be said of the KFC chicken shortages earlier this year. So, the multi-unit / multi-brand franchisees learnt to diversify, perhaps owning a chicken, pizza and coffee brand. With worries regarding staff shortages following Brexit, multi-unit/multi-brand operators are looking for new opportunities in sectors where there is greater reliance on technology and less need for staff. Many are looking at fitness and wellness concepts and service concepts that are less labour intensive.
Interestingly, these multi-unit/multi-brand operators typically do not want to become master franchisees as they feel that requires a different skill set and does not play to their key strengths, which is operational implementation rather than the recruitment, training and management of franchisees. Another appealing factor is that these multi-unit/multi-brand operators are often regionally based within the UK and they understand the geography and markets in those regions. Appointing a number of regional multi-unit franchisees rather than one master franchisee could quickly give a foreign brand coverage across the UK.
The advantages and disadvantages of dealing with multi-unit/multi-brand franchisees
From a franchisor’s point of view the great attraction of such multi-unit/multi-brand operators is that they have a huge amount of operational expertise and an established infrastructure and the financial resources to expand quickly. If a foreign brand is seeking to enter the UK in a competitive sector (such as gyms) by using experienced multi-unit/multi-brand operators the brand owner may be able to quickly get coverage in the UK ahead of other gym brands. In allowing multi-unit franchisees to open multiple stores, franchisors know they are dealing with someone who has experience of the system and a proven track record and will need so much less support then a new franchisee. Often successful multi-unit franchisees are able to take over poor performing franchisees. A system that uses multi-unit operators will have less franchisees to deal with but this can be a blessing and a curse.
Partnering with such franchisees is not without a potential downside for franchisors. Fundamentally the nature of these multi-unit/multi brand franchisees means that the classical relationship dynamics between the franchisor and its franchisees are bound to be impacted due to the size and bargaining power of the franchisee. These franchisees do have the resources to challenge the franchisor. Another disadvantage is that by over extending themselves they are not able to implement a new brand concept. There is also a risk of know-how “leakage” and potential cross contamination between different concepts.
However, matched against the obvious commercial upside these risks are clearly manageable so long as franchisors do not simply ignore them. Franchisors will probably need to adapt their ways of working for multi-unit / multi-brand franchisees but if care is taken we believe it will be worthwhile.
How can franchisors best engage with multi-unit/multi-brand franchisees?
To be successful in the UK market most foreign brands need to invest a good deal or time and money adapting the concept to the UK market or finding a developer or master franchisee with sufficient faith in the brand to make that investment for them. For well-known legacy brands that may be possible but for many smaller brands that is often a struggle. By partnering with a successful multi-unit/multi-brand operator, such franchisors can effectively pilot and adapt their brand to the UK market on a relatively low risk manner. Of course, it is critical that this new style relationship is properly structured and documented. A classic joint venture is unlikely to work but a subordinated equity type relationship is a proven way of structuring an effective catalyst for such a relationship.
A subordinated equity arrangement is a variation on the traditional joint venture model adapted for the franchise industry. In a subordinated equity arrangement, a franchisor takes a minority shareholding in a franchisee company but the primary relationship between the parties remains that of franchisor and franchisee rather than as joint venture parties. The franchisor exercises the usual controls over the franchisee under the franchise agreement rather than by holding board and shareholders meetings under a joint venture agreement. A special purpose vehicle is set up with the multi-unit franchisee as the majority shareholder and the franchisor holding a minority stake. Multi-unit franchisees favour this arrangement as the franchisor "has skin in the game" and it will encourage the franchisor to establish a "boots on the ground" presence locally to help set up the new concept. The franchisor benefits by having the greater rewards that equity participation brings and also, in some cases, the option to buy out the franchisee company once the concept is established at a pre-agreed valuation.
If a foreign brand already has a master franchisee in the UK accessing good unit franchisees is always a challenge. Potentially good operators can find it difficult to obtain the required capital to invest in a franchised business and many of those with the available capital do not fit the brand profile or are unlikely to be good operators. Also, managing a large number of individual franchisees spread the length and breadth of the country is a stretch for many developing franchise concepts. Engaging with multi- unit/multi-brand franchisees could be a solution to this challenge for master franchisees.
New start up UK based franchisors can also take advantage of multi-unit/multi-brand franchisees. Proving a concept and establishing the first 10 or so franchise outlets is a hard and slow process for new franchisors. One potential solution to this is partnering with a multi-unit/multi-brand franchisee and leveraging off of its operational expertise and infrastructure. Clearly this type of relationship is very different from the classical franchisor/ franchisee relationship but, properly structured - perhaps through a subordinated equity structure (as mentioned above),this could enable brands that will otherwise struggle to get over the sustainability threshold as regards the number of outlets, to leap frog over those market entry barriers and establish themselves as a successful and credible brand much more quickly and with fewer difficulties than would usually be the case.
The way forward
So, in conclusion, the UK franchising market has evolved, in an almost Darwinian fashion, to offer franchisors the opportunity to take advantage of a new "gene pool" of relevant expertise and capital that handled appropriately can greatly add to their chances of success. Foreign franchisors and UK start-ups should consider developing their brand in the UK using multi-unit / multi-brand franchisees rather than appointing a master franchisee.
The key is to ensure that the relationship with them is captured in an appropriate legal mechanism. Joint Ventures rarely succeed, particularly between franchisors and their franchisees. Instead, subordinated equity structures and other specially developed relationships can be used to ensure a full alignment of interests and mutually attractive exit strategies.
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