Starting up a new franchisor vs. 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 company along the lines of Michael Gerber’s “E-Myth” style, and even if they did, it could take 10 years to debug 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 developing and print shops to name a few, each a perfect industry to franchise at that time.

Now, since the evolution of a perfect business model takes so long and there are no guarantees that you will ever achieve it, developing a business for a franchise later on 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 SHOULD Ask.” In that article, the author stated that a master franchise buyer should certainly ask; “Is there flexibility for the main franchisee to negotiate the terms of the sub-franchise agreement?” and then scored; “Not really, but there’s arguably no money in the main franchise if no sub-franchises are sold. Look for language in the main 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 getting started, you often have to make a few deals along the way, and this means there’s a bit more negotiation involved when selling your first 10-20 franchises. If you purchase a master franchise, you are essentially playing the role of franchisor and will essentially be a new franchisor in the region described in your agreement. If you can’t make deals to make things work, you may have trouble expanding at an adequate 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 system. Please consider all this and think about it.