How do franchise businesses expand internationally?

How important is master franchising for the internationalization of a franchise?

Master franchising involves the granting of a licence so that the master franchisee can build up the franchise system in a country or a large region. Master franchisees have the right to use the licence to conclude sub-franchise agreements with franchisees for which they receive a direct or indirect financial payment. This is primarily used by foreign franchise systems which wish to expand their proven national franchise concepts onto international markets.

The normal method of approach used by a franchising system is for the most part used for master franchising. Having tested the franchise concept in a pilot business, the master franchisee then takes on the role of franchisor for the franchisees in the country/region in question. A master franchise agreement allows the strengths of a well-established system to be united with the detailed knowledge of a certain territory.

A six or seven-figure sum is generally required to purchase a master franchise licence. Such an investment can be of interest to an individual person or a company if the adaptation of a franchise concept means less time and fewer costs than developing a new idea and concept.
Master franchisees must have extensive business knowledge, commercial experience and high levels of social competence to be able to adapt the franchise concept to the local market conditions, to recruit, train and support the franchisees as well as to run the network and systems head office. Knowledge of foreign languages is essential to be able to work together with a foreign franchisor.

With certain modifications master franchises use the procedure methods of franchising whereby the owners of master franchises take over the role of the franchisor when dealing with the other franchisees. Within the framework of a master franchise agreement the strengths of a well-developed system are combined with the detailed knowledge of a certain area. The advantages of master franchising are particularly noticeable in the following areas:

Entering the Market
Qualified master franchisees spare franchisors the time and effort of having to collect information on specific market conditions, laws, business practices and financing sources. As a result the risk of making a wrong decision due to an insufficient information basis is reduced and entry onto the market is accelerated.

Entrepreneurial Risks
The owners of master franchises are responsible for building up the business. Normally they must contribute a considerable amount of finance and take over a great extent of the entrepreneurial risks in order to establish and develop the franchise system in their areas. In return master franchisees receive a share of the financial success of the franchisees who are found, selected, and trained by them. It is only worth using this additional master franchising level, however, if the market chances are good and the profit margin large.

Amount of Work Required
As far as the granting of single licences are concerned, franchisors must only deal with one partner in a certain territory. The training, experience and suitability of master franchisees determine to what extent the work load of franchisors can be reduced and how the system will develop within this territory. If master franchisees have the advantage of experience by owning a pilot business, they can then carry out training and advice from the very beginning and only receive help from the systems head office when they have problems to be solved.

Quality Standards
If the abilities and commitment of the master franchisees correspond with those of the franchisors, then there is a good chance that the separate franchisees will also reach the required level of performance. Internationally successful franchise systems attach great importance to the supervision and upholding of mutual standards of quality. In order to achieve this master franchises are involved in the reporting system.

Direct Contact
With the agreement of master franchisees, franchisors also have direct contact with the separate franchisees. Such a contact is achieved through regular conferences as well as occasional visits to the businesses themselves. Such meetings, which emphasise the importance of the separate franchisees within the whole system, often create a kind of family atmosphere. They produce a positive atmosphere and feeling of confidence, which is characteristic of successful companies.

It is occasionally the case that master franchisees are unable to achieve the required quality standard within their areas despite comprehensive training and advice. Should this be the case then franchisors are forced to end the cooperation as quickly as possible to prevent these problems having negative effects on other territories. Even if the terms of such a separation are carefully regulated in the franchise contract many problems can still occur. Thus franchisors can find themselves facing an insufficiently trained or even unmotivated network of franchisees that at best may have mixed feelings towards a change.

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