Does regional master franchising work?
Legal expert John Pratt discusses regional master franchising in the UK and asks, does it work?
I recently read about a foreign franchisor that had created 30 regional master franchise territories in the UK. Each regional master franchisee was required to operate its own pilot and then to meet its initial minimum target of 10 franchised units. In return the franchisor receives fees of approximately £200,000 for each regional master franchise. The mathematics speaks for itself. If 30 regional master franchise territories were, in fact, granted and were granted for £200,000 the franchisor would receive £6 million! No wonder the franchisor was attracted to the idea of granting regional master franchises. Unfortunately the concept simply doesn’t work.
Regional master franchising works inlarge countries such as the USA, Canada and Australia. In Australia it simply doesn’t make sense for a franchisor based in Sydney to operate in Perth. The distances are too great. In very large markets like the US it does not make sense to entrust the whole country to one master franchisee and so it is common to grant master franchises for a state or a small group of states. These considerations do not apply in the UK. At a pinch, a franchisor could offer a master franchise for Scotland and for Ireland as well as England and Wales, but it is unlikely that there would be a sufficiently large standalone market in either Ireland or Scotland.
Regional franchising holds out for a franchisor as the prospect of very large up-front payments, which are way in excess of what a master franchisee for the UK, as a whole, would be prepared to pay but what is in it for prospective regional master franchisees? The short answer is very little and that is why regional master franchising historically has not worked in the UK.
Regional master franchisees are required to pay much more for their initial rights than they would if they were simply taking a single unit franchise. This means that money they could devote to making their first outlet successful is simply not available and yet they will have to comply with a development schedule that obliges them to grant a specified number of franchises by set dates. The regional master franchisee could lose its rights if it does not achieve the development schedule. To make matters worse the franchisee has no control over how good or bad neighbouring regional master franchisees may be and, accordingly, others in the network could have a substantially negative impact on their business. One regional franchisee could, for instance, adopt the approach of, “does the prospective franchisee have a pulse and a cheque book?” and if he does he will be recruited. This would inevitably lead to a negative impact on the business as a whole and the impact could be close to home if this approach was being adopted by a neighbouring master franchisee.
What prospective regional master franchisees should be doing is entering into single unit franchising agreements – after the franchisor has successfully piloted the operation in the UK and not before. The franchisee could seek area development rights whereby that franchisee could open additional outlets itself if the first unit and subsequent units are successful.
It is disappointing that foreign franchisors seem to be prepared to enter the UK market without obtaining expert local knowledge. Hopefully, the market will ensure that their ill advised venture will not succeed and that prospective regional master franchisees will receive expert advice and not be tempted by offers that make no commercial sense.
John Pratt is a solicitor and partner at Hamilton Pratt Business and Franchise Solicitors.
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