Starting up a new franchisor versus buying a master franchise

Many small business owners at some point think to themselves; I would like to franchise my business. And, even if they’ve never considered the idea, often a client will tell them they should. Of course, no small business person has ever built their business along the lines of Michael Gerber’s “E-Myth” style, and even if they did, it might take 10 years to iron out the business model to make it perfect. , and at that time such a business model may not be appropriate in the economy. Many business models have come and gone; video rental stores, photo processing and print shops to name a few, each a perfect industry to franchise at the time.

Now, since the evolution of a perfect business model takes so long and there are no guarantees that it will ever succeed, developing a business for a franchise later is a very risky undertaking. It might be much smarter to simply buy a master franchise and develop a region, state, or country under the franchisor’s business model and become what they call a “mini-franchisor.” Let’s talk about this for a moment.

The December 2016 issue of Global Franchise published an important article titled; “14 Questions a Master Franchisee MUST Ask.” In that article, the author stated that a master franchise buyer should certainly ask; “Is there flexibility for the master franchisee to negotiate the terms of the sub-franchise agreement?” and then scored; “Not really, but arguably there is no money in the master franchise if no sub-franchises are sold. Look for language in the master franchise agreement that might state ‘unless otherwise agreed by [insert franchisor], the initial franchise fee will be… ‘ This indicates that there may be a procedure whereby the master franchisee could sell franchise units at a lower initial fee if necessary. Any possible flexibility should be negotiated with the franchisor prior to the signing of the master franchise agreement.”

Exactly!!! You see, when franchising a concept and just starting out, you often have to make a few deals along the way, and this means there is a little more negotiation involved when selling your first 10-20 franchises. If you buy a Master Franchise, you are essentially playing the role of a franchisor and will essentially be a new franchisor in the region outlined in your agreement. If you can’t make deals to make things work, you may have trouble expanding at the right pace to ensure adequate ROI for you, and you could find yourself in trouble not being able to keep up with your development schedule and agreement to make grow the system. Please consider all this and think about it.