As desirable as it may be to acquire the rights to a famous franchise brand from one country and develop it in another country – a concept known as master franchising – the fact of the matter is that too often it doesn’t work!
Little is known about the size and impact of master franchising worldwide, but that doesn’t make it any less desirable for both franchisors and prospective master franchisees. At its best, master franchising helps a franchisor expand its network and increase sales internationally faster than any other concept, while also helping a master franchisee establish a brand name in a new territory almost overnight. But at its worst, master franchising becomes a nightmare for both franchisor and master franchisee, with the latter often losing a huge sum of money.
“All is not well in the relationship between franchisors and master franchises,” says Harish Babla, who has tracked master franchisees for many years and who surveyed franchisors and master franchisees in 2013. Half of the master franchisees that responded to his survey said they would not acquire a master license again. Meanwhile, most of the franchisors said the performance of their master franchisees was just average.
And yet, Duskin makes it look so easy! For nearly half a century, this Japanese-based franchise conglomerate has gobbled up American franchise brands and turned them into goldmines. The company that likes to “smile on people,” is the master franchisee of numerous service-related and food franchises including names everyone knows, such as ServiceMaster, Terminix, Merry Maids, TrueGreen, Home Instead, Mister Donut, Café Du Monde, and more.
Duskin, and the franchisors who sell to Duskin, have figured it out. And so have dozens of other franchisors and master franchisees in an untold number of countries. In these situations, both franchisor and master franchisee pay attention to some key principles that can make or break any master franchising relationship.
United Franchise Group (UFG) in West Palm Beach, Florida, is a perfect example of a franchisor that has figured it out. While the company owns seven brands, all but one in service industries, most people know UFG for their flagship brands: Signarama and EmbroidMe. In addition to hundreds of outlets in the USA, UFG supports 41 master licenses covering more than 70 countries.
From the moment he established UFG, when he was a young entrepreneur, Ray Titus knew that his business would include master franchisees. Today, the company is known as “the global leader for entrepreneurs.” Almost 30 years ago, Titus hired Tony Foley to sell international licenses, and to do so in a very deliberate way.
Target market
“We have developed a metric system to evaluate a target market for master franchising,” explains Foley. “We look at all of the following: the country’s political structure, state of the economy, currency comparison vs. the U.S. dollar, franchise laws, the ability to remit money to the USA, franchise development within the country, and the language of the country.” If any metric doesn’t meet UFG’s standards, that country doesn’t go on the list for potential master franchise development.
This due diligence, performed on a country instead of a company or an individual, is often overlooked by franchisors who are new to international development, but who want to reap the projected benefits of flying the company’s flag in another country. Sometimes it’s overlooked because the franchisor is pursued by an aggressive prospect who just knows that the business will succeed in his market, and that he’s the guy to make it happen. These scenarios, which occur regularly for even up-and-coming brands, are often the downfall of master franchising.
They don’t work not only because the franchisor isn’t prepared for an international opportunity, but also because the prospective master franchisee is even less prepared.
When it comes to evaluating master franchise candidates, few franchise sales executives are as savvy as Foley. He speaks to hundreds of prospects annually, and rejects most of them. In his best sales year, he sold 15 master licenses, but it takes time – usually months – to complete his due diligence on just one prospect.
“As I get to know candidates who are interested in a UFG master license,” he explains, “I’m acutely aware of what a candidate might not be able to provide that’s essential to our mutual success. It’s a given that candidates must be able to afford a master franchise investment, which is usually going to mean several hundred thousand dollars and often more than a million dollars. But I’m also looking for business experience, an understanding of the marketplace where the candidate plans to expand our brand, managerial qualities, sales qualities, and the ability to speak English. A master franchisee needs a multitude of skills. Miss one of the skills and eventually the whole thing falls apart.”
In addition to the aforementioned requirements, Foley has two other tests for prospective master franchisees. “The candidate must complete a Discovery Day at our corporate offices. This is critical for both the candidate’s benefit and ours. We get the opportunity for several of our corporate and support team members to meet the candidate, typically over a two-day period. The interaction becomes an interview for both parties and really uncovers information about personality, skill sets, values, ability to communicate, passion, and much more. The candidate also gets to see what we value and how we operate.”
Master license
Candidates who visit UFG can’t help but get excited about the possibility of buying a master license, but there’s still another test. “I need to visit them in their market,” says Foley. “This is invaluable as it often reveals how they behave in a comfortable environment, and among family and friends. It’s also an opportunity to meet the team that could not come to the Discovery Day. These individuals will have a direct influence – positive or negative – on the business, and it’s important that we know that in advance. Our most successful businesses are team operations, not individual operations.”
Of course, it helps that Foley knows what to look for, what to ask, and where to probe for information as he conducts his due diligence. It also helps that UFG is willing to invest the money that allows Foley, and other members of the international team, to vet master franchise candidates.
Therein lies the first clue to a prospective master franchisee that a franchisor isn’t equipped to succeed in an international relationship. It’s essential that a franchisor invest in getting to know a prospect. Otherwise, the prospect is better off finding another franchise brand to buy.
Oftentimes a prospect discovers a brand, meets the franchisor (who has little or no international experience), visits the corporate office, and in less than a month or two, with neither party really knowing the other, acquires rights to develop the business at home.
The disconnect
And those are businesses that Babla, based in Singapore, expects to be average at best, and in the long run not succeed. “It is clear,” he says, “that franchisors and master licensees view their businesses from two completely different angles, resulting in a Big Disconnect.”
Babla’s survey found four areas of ‘disconnect’ between franchisors and franchisees.
Disconnect on what it takes to be successful. Franchisors see recruitment as most important, i.e. a master franchisee succeeds by selling unit franchises in the local marketplace. But master franchisees believe operational improvements are most important.
Disconnect on ongoing support. Half the master licensees Babla surveyed said they were dissatisfied with the franchisor’s ongoing support. Of course, it takes a good chunk of money to support a master franchisee who’s thousands of miles from the corporate office. Many franchisors can’t afford the support.
Disconnect on performance of master franchisees. A whopping 59% of franchisors said their master franchisees were average performers. Oftentimes the master franchisee understands the business, but doesn’t know how to sell the business locally.
Disconnect on operational focus to grow the brand. Master franchisees believe that operational improvements make it easier for them to recruit franchises, but franchisors seem to think otherwise, especially when the improvements come at their expense and may not be universally compatible.
“What gets overlooked in the race for increasing franchise outlets,” Babla says, “is the development of the master licensee business, which includes training, supporting, and mentoring master licensees to become successful clones of the franchisor.”
By following these essential points of information, even when they require an investment, franchisors and master franchisees are more likely to succeed internationally.
ABOUT THE AUTHOR
Dr. John P. Hayes is a best-selling author of numerous books about franchising, and blogs at HowToBuyAFranchise.com. He is a business professor at a private university in Kuwait.
