Master Plan

Some people think of ‘buying a franchise’ as being about buying a café or a cleaning business and working in it yourself – and for many people, that’s exactly what they do. If they want to expand beyond that, they buy a second or third outlet, or employ staff to handle more business.

But there is another way to expand through franchising, and that’s to acquire a master franchise. A master franchisee takes on some of the responsibilities for developing the franchise in a particular region, or even on a national basis. They recruit, train and support individual franchisees and, in some cases, may also set up their own operations. In return, they generally receive a proportion of each new franchisee’s initial and ongoing fees – these arrangements vary from business to business.

Some master franchisees at national level may not sub-franchise at all, retaining ownership of all their own outlets, like Starbucks and Wendy’s, for example. Some, like The Coffee Club, have no company-owned outlets, focusing totally on supporting franchises. And others may operate a mix of company-owned and franchised outlets, like Pizza Hut.

Look through this website or our magazine and you’ll find a number of master franchises available. These include national opportunities such as Hudsons Coffee, Hog’s Breath Café and Gloria Jean’s, and regional masters like Epiphany Café, Portermark, Jim’s and V.I.P. Home Services. Some are more suited to large companies with access to finance and an established infrastructure, while others may be taken on by individuals or couples looking to start small and grow big.

Your own region

Gary Turton is a regional master franchisee for Jim’s Mowing. His region covers Auckland’s North Shore, where he is responsible for 25 sub-franchisees, as well as having customers of his own. He bought the master franchise after having run his own successful IT business.

‘I saw that a strong, established brand like Jim’s provided the ability to leverage my skills to earn more and build a business more quickly than doing it myself,’ Gary says. ‘I had a long-term vision to create an ongoing income stream while doing minimal work – well, I was wrong about the minimal work part!’ he laughs. ‘My roles include business marketing and sales; sub-franchisee selection; business and marketing trainer; technical trainer; brand guardian; coach; co-ordinator; adjudicator; motivator; counsellor; information hub; supplier deal maker and liaison. I’m also a forecaster – both of weather and potential personal or team issues – a backup mowing contractor and a lender of gear.’

As Gary’s list suggests, one of the prime requirements that master franchisees need at a regional level is people skills. ‘Learning to mow lawns and run a business is one thing, but learning to be a master franchisee is another thing entirely,’ says Gary. ‘When I joined Jim’s, I had to do a week-long master franchisee induction course before they would accept my payment and allow me to sign. Some potential master franchisees were rejected from the course as their attitude was wrong. This really impressed me.’

Gary says that there are many advantages to being a master franchisee. ‘The hard work has already been done for you: the system has been created and is proven to work. You have a lot of flexibility within your region and you are able to take time off and still keep earning. You also benefit directly from your successful efforts. I love seeing my sub-franchisees succeed, often beyond their wildest dreams, or hearing that my training advice has worked. Because I select, train and support them, their achievements are a direct result of what I do.’

Of course, there are downsides, too. ‘You have to work within the system and so decisions can be slower than you might like sometimes, and the other master franchisees I work with might not share my ideas,’ admits Gary. The biggest concern, however, is that shared by franchisors and sub-franchisees alike. ‘When you are recruiting, the consequences of a poor selection decision can be very long-lasting and damaging because you have to divert resources until the sub-franchisee either comes good or moves on. But the overwhelming majority of my team have been successful, which is why the business has more than tripled in my time.’

Bringing in an overseas brand

Jim’s was already a well-known brand in New Zealand before Gary took up his master franchise, but that’s not usually the case if you import a franchise from overseas. That means that, although a franchise system may be well-established in another country, its success is not assured in NZ where market conditions and competitor activity are different.

In many instances the creation of brand recognition – so vital to attract both customers and sub-franchisees – will have to be established by you, the master franchisee. Of course, the franchisor will provide basic marketing material but the core effort must be made inside the territory itself.

A national master franchisee therefore needs to be more entrepreneurial and have the skills and resources to develop the franchise locally. Wise buyers seek to reduce the risks as far as possible by carrying out their own thorough research into the local market for the product or service, and confirming that the price asked and the number of outlets proposed by the franchisor is realistic. Overseas companies often have little understanding of the local market or the dispersed nature of our population, so it pays to use local specialists to analyse any opportunity.

A different perspective

Bill Edwards, a hugely-experienced US-based consultant who represents franchisor clients looking to expand internationally, says that New Zealand is an attractive destination for international brands because it’s an English-speaking, franchise-friendly country. However, he is also aware of two huge limitations: market size and investment ability.

Bill’s clients fall into two broad categories: one is food, the other includes education, retail and service.

Food franchises require a minimum unit commitment from a master franchisee in order to cover the costs of country start-up. All but one of the brands he represents require a 10-unit minimum commitment: any less and it is difficult for a franchisor to justify committing resources that could be utilised in bigger markets. His experience is that New Zealand entrepreneurs are frequently unwilling or unable to commit to a 10-unit minimum, whether on a company-owned or sub-franchised basis.

For education, retail and service franchises, minimum numbers are less of an issue but the start-up costs are considerable. The minimum master franchise fee for any of his brands is US$150,000. From the franchisor’s point of view, that figure just about covers the country start-up and support costs for the first two years of the master franchisee’s operations when number of units and royalties are very low. From the master franchisee point of view, however, it represents a huge commitment when added to the research and establishment costs of a pilot operation as well as the investment in recruitment and support of the first sub-franchisees.

The result is that overseas franchises can find it difficult to attract New Zealand master franchisees with the requisite capital, and New Zealand individuals or companies often feel that it will be difficult to recoup the investment within the expected time frame. Informed discussion and careful negotiation may be needed.

Learn all you can

I recently met an international franchisor who was in the early stages of appointing a master franchisee for New Zealand for their US-based services company. They were quite unusual in that they had already made two visits to the country themselves. As experienced international franchisors, they had a very well-developed plan for the country with extensive market analysis and pre-mapping, but they knew that only by being on the ground and meeting local specialists could they hope to understand the potential of the market here.

They were also relatively unusual in that they had a proper training programme in place for master franchisees: all too often, new international masters go through the standard franchisee operations training in the franchisor’s home country but are given little training in how to carry out their own recruitment, training and support roles for sub-franchisees when they get home. This is something else that has to be built into your research and planning.

It takes time

If your aim in taking up a regional or national master franchise is to sub-franchise, you will need to ensure that you are properly funded. Franchising takes time, and it’s best to establish a pilot operation first to test the local market, establish supply lines and make any necessary adjustments to products, services, systems or marketing techniques. This fine-tuning means that it will probably take longer than subsequent outlets to become profitable, but having 12 months or more of trading under your belt will expose any seasonal variations and give you real figures to show your first potential sub-franchisees. Profits from the pilot operation may then fund the initial sub-franchising programme, or the pilot may be sold as an established business to a sub-franchisee.

The pay-back period for a master franchisee is longer than for a sub-franchisee. The master franchisee needs to do their research, learn the business, establish the brand and develop training and support structures before recruiting the first sub-franchisee. Even then, the level of support new sub-franchisees require usually means that it is not until several franchises are established that the investment starts to pay off. However, once successfully established, the payback from a master franchise can be very handsome indeed.

If you have access to the necessary capital and have the skills to make it work, buying a regional or national master franchise can offer a truly valuable business opportunity where you can use your own or your organisation’s skills to the full with the backing of a proven business system.

 

This article also appeared in Franchise New Zealand (Year 27, Issue 2) and can be read in our digital issue of the magazine, or ask for your own free print copy.

We welcome links from other websites to this article. Please note that this article is copyright © Eden Exchange NZ Holdings Limited, Franchise New Zealand magazine and Franchise New Zealand On Line. While it may be downloaded for personal use, no part may be reproduced on any other website, in electronic or printed form or in any other form whatsoever.