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Join a proven concept by opening a master franchise

Master franchise: definition & key steps

To set up operations in a new country, a franchise can either create a subsidiary or call on a master franchisee, i.e. an investor familiar with the target market’s customs, language and practices. A look at a principled system adopted by brands keen to break into new markets and stack the odds in their favour.

Master franchise : definition

A master franchise is a system that allows a concept to cover a territory through an intermediary who acts as both developer and manager. This saves valuable time in terms of development, since all parameters relating to law, culture and language are handled by the master franchisee who, as a native of the country or territory, is fully conversant with them.
As in a traditional franchise agreement, the return on investment does not go to the parent company but to the master franchisee, who takes responsibility for preliminary research (market, locations, etc) and recruiting head office staff, for example.
The parent company grants operational rights in that territory in exchange for a share of revenue or a royalty fee that the master franchisee receives from his franchisees.

Master franchisees have intimate knowledge of the target territory – language, customs, laws, etc – since they are local. This gives the business a major kick-start and also facilitates relationships with future franchisees.

Keys steps

There are a number of key steps to setting up a master franchise. First of all, you must ensure that there will be demand for this concept from the target market, which means conducting an in-depth market survey. Another prerequisite is a business plan listing all the information available at the time, as well as plans for future expansion. A concept that is brand new to the target territory, or where there are only a few stores, will have a better chance of success than a concept that enters a saturated market with strong competition. Marc Lanciaux, a lawyer and French Franchise Federation consultant, says that “the first question to ask before embarking on a master franchise is about the destination market: is it saturated? Is there much competition or is the concept you want to introduce still underdeveloped?”
The phase of adapting the original agreement to the target country’s legislation is paramount and all economic and financial characteristics of the legal framework must be taken into account for the project to be viable.

It is also strongly recommended that the concept be tested at a pilot store for at least a year, since success in the original country provides no guarantee of success anywhere else, and changes may be necessary. This is especially true for ready-to-wear and restaurant concepts, where some would say that consumer taste depends very much on nationality.

After buying the master franchise, the network needs to be launched, which means organising the functions of head office staff and placing particular emphasis on the development department, since the goal of the master franchise is to open as many stores as possible in a shorter time frame than would be the case for a simple foreign franchise.

In France, for example, the Doubin Act applies to both franchises and master franchises. The responsible entity must in both cases prepare a pre-contract disclosure document (DIP), provide future franchisees with all necessary strategic information prior to signature of the agreement, and transfer full know-how before the business actually starts operating.

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