Why Become A Franchisor When You Can Buy Into A Master Franchise Agreement?

In early retirement, I do a little bit of consulting in the franchising sector. You see, I built up a perfect business model of my small business and after a decade felt it was ready to franchise. In doing so, I learned a lot, and I learned most of it the hard way. Suffice it to say the franchising industry is pretty difficult, over-regulated, and as a franchisor you are much more apt to go out of business than if you were to buy a franchise. Likewise, you’d be better off to buy a master franchise of a franchising system with a proven track record than to try to perfect a business model and then attempt to franchise it.

Often when master franchise buyers came to me about securing a master licensing agreement, they were particularly concerned about costs. They were also more rightfully concerned with revenue split – that is to say; how much of each franchise fee could they keep for every unit sold and how did we intend to split the royalty income stream – likewise in our case; percentage of soap sales and equipment sales (Mobile Car Wash Franchise Business).

Now then, let me tell you that as a franchisor it was hard to want to give up any of that, but alas, as my franchising company grew I realized just how hard it was to maintain a rocket ship growth and still fulfill all my duties as a franchisor.

Recently, there was an interesting piece in Global Franchise News titled; “14 Questions a Master Franchisee MUST Ask,” published in December 2016 issue.

The article stated; “Before signing that master franchise agreement, be certain that you can answer these essential questions, says Adam G. Wasch,” and the first item discussed was; How much will a master franchise agreement cost me? And the article explained: “This is the million-dollar question. The typical initial fee for a master franchise agreement will be significant, but it should also be commensurate with the brand awareness of the brand in, and the size of, the specified territory. You can expect to pay multiple six-figures for the rights to become a master franchisee.”

In our master franchise agreement we did a 1/3 – 2/3 split of the initial franchise fee for each new unit sold, we kept the 23rds portion, but also did the training. Later with larger well-financed master franchisee buyers we did a half-half split, but they had to do the training of the new franchisees themselves. On the royalty side we did the 50/50 split from the beginning.

Trust me when I tell you, I’d have rather purchased a few master franchise territories of someone else’s franchising system, than have to do the whole thing from seed to weed all over again – Just Saying.

Is Franchising The Best Way To Expand Your Business?

You want to expand your business and you are wondering whether or not franchising is the best way to do it. To help bring some clarity into this question, this article will attmept to simplify this topic. When you think of expansion, you need to keep the following three points in mind:

  • You want your business associates to use the name of your business (your brand),
  • You want to dictate to them how to operate their businesses; and
  • You want them to pay you money now and on an ongoing basis.

If all of these three conditions are present, the law says you have a franchise. Some people find that the cost of franchising a business can be steep and try to use a different name for their network such as: an agency, a license, or some other form of business opportunity. But as they say: “If it looks like a duck, swims like a duck and quacks like a duck, it is probably a duck.” So, no matter what you call it, if it has all three of the above conditions, it is a franchise. If you call it something else and are challenged, you are going to lose, and will most likely have to pay severe penalties depending on what the dispute is about or where in the country it arises.

On the other hand, you may meet the definition of franchising as it is set in the franchise rule and may have the desire, resources and energy to franchise your business, but there is more to this decision. There are more questions you need to ask yourself, such as:

  • If you had to pay someone a royalty fee, would your business still be profitable?
  • Do you have marketing, administrative and operational systems in place?
  • Can you easily teach these systems to someone else?
  • Will you offer value to your franchisees, not only in the first year, but on an ongoing basis for the life of the franchise agreement?
  • Do you have a “secret sauce”? That is: Do you have a significant competitive advantage that allows you to stand out from yourcompetition and that will do the same for your franchisees?
  • Do you have the resources (time and money) to devote to the franchising efforts?
  • Do you want to change what you do now to the business of franchising which includes recruiting, training, and supporting franchisees as well as making sure that your company stays ahead of the competition?
  • Are you using technology in your business now to the fullest advantage? Are you willing to invest in future technology for communication, marketing, management ease and efficiency purposes?

If you answered “no” to these questions, franchising may not be the best answer for you at present. You need to get some things in place first before you consider franchising your business. Other articles will explore the conditions you must have in place before you franchise your business. Make sure to stay tuned to this information.

Agreements in Franchising and Confidential Operations Manual And Specifications

How important is it to have the confidential operations manual in a franchise company? Indeed, it always amazed me how many franchise companies would start out without ever having written their confidential operations manual. They may have had 20 years experience in a small business model, identical to the one they wish to franchise, however they had never written to manual.

I recommend “E-Myth” By Gerber and perhaps this will address some of what I am trying to say. The consistency and integrity of a franchise system and its brand-name rely on a duplicatable method of doing business. The confidential operations manual and it’s specifications must be followed consistently by each franchise outlet. In fact, this issue is so important that I have copied the clause in my franchise company’s franchise agreement, which addresses this issue;

3.7 Confidential Operations Manual And Specifications

For Initial And On-Going Equipment, Inventory And Supplies Our industry is highly competitive. Continuous efforts to maintain, update and improve the System are essential. The developments Franchisor will make for the benefit of the System as a whole are contemplated throughout the term of this Agreement. The continuous development of the System in this manner is an important and beneficial aspect of the relationship Franchisee wants to have with Franchisor. Franchisor agrees to provide Franchisee with one password to access the loaned copy of The Car Wash Guys Confidential Operations Manual once Franchisee has paid to Franchisor the Initial Fee, in full. The Confidential Operations Manual contains the System, including specifications, standards, operating procedures, accounting and bookkeeping methods, marketing ideas, inventory requirements and control techniques, wash unit plans and specifications, equipment and sign requirements, public relations and other rules that Franchisor may prescribe from time to time. The Confidential Operations Manual is and will remain confidential and Franchisor’s exclusive property. Franchisee will not disclose, copy or duplicate any part of the Confidential Operations Manual for any reason.

Franchisor develops minimum requirements for wash products, chemicals, merchandise, inventory, supplies, stationary, business forms, advertising, decor, wash unit plans and specifications, materials, equipment and signs, among other things. These requirements are outlined in the Confidential Operations Manual. Franchisee will purchase all wash products and inventory items specified in the Confidential Operations Manual. Franchisor may amend the Confidential Operations Manual, including changes, which may affect minimum requirements for the franchise operations. Franchisee will strictly adhere to the requirements of the Confidential Operations Manual as Franchisor amends it from time to time. Franchisee will implement immediately all changes at Franchisee’s cost, unless Franchisor otherwise specifies. Franchisor reasonably may restrict Franchisee from producing, stocking, and selling certain items and goods, from time to time, as specified in the Confidential Operations Manual.

Franchisee may purchase some wash equipment, inventory, and supply items from Franchisor, if offered, at Franchisor’s then current prices. If Franchisee desires to purchase any items from Franchisor, payment arrangements must be made when Franchisee places their order. The items Franchisor may offer include among other things equipment, merchandise and supplies that bear the Service Marks. Franchisee must purchase all wash products, supplies, chemicals and inventory items from Franchisor, if offered, or suppliers Franchisor approves from time to time.

Franchisor will not be liable to Franchisee if Franchisor is unable to deliver equipment, inventory, chemicals or supply items to Franchisee because of any loss, damage, or delay caused by strikes, riots, fire, insurrection, war, elements, embargoes, national or local holidays, failure of carriers, inability to obtain transportation facilities, forces majeuer, acts of God or of the public enemy, or any other cause beyond Franchisor’s control.

Franchisee must purchase all equipment, chemicals, products, supplies and materials required for the operation of the Franchise from manufacturers, vendors, suppliers or distributors approved by Franchisor. All specifications that Franchisor requires of Franchisee and lists of approved vendors and suppliers will be included in the Confidential Operations Manual and the Franchisee Forum intranet system. Franchisor will use their best judgment to set and modify specifications in order to maintain the integrity and quality of the franchise system.

Additional car wash trucks/units and related equipment must be purchased through Franchisor, if offered, or from a list of approved vendors. Franchisee understands that the prices of such equipment bought from Franchisor may be raised or lowered by Franchisor from time to time due to increases or decreases in prices by Franchisor’s vendors. Franchisee further understands that items Franchisee buys from vendors might also change in price.

Upon advance written request, Franchisee may request Franchisor approval to obtain equipment, chemicals, products, supplies or materials from sources that Franchisor has not previously approved.

Franchisor requests that Franchisee seek out manufacturers, vendors, suppliers and distributors in their Marketing Area to continually expand the approved vendors and products available to franchisees systemwide. Franchisor additionally requests that Franchisee seek out new services, concepts, technologies, materials and methods from their Marketing Area that can be introduced to continually update, improve and expand the System and keep all franchisees system wide on the leading edge.

Franchisor may require Franchisee to give Franchisor sufficient information, photographs, MSDS sheets, drawings, samples, and other data to allow Franchisor to determine whether the items from these other sources meet Franchisor specifications and standards, as established from time to time. These specifications and standards will relate to quality, texture, composition, absorbency, strength, finish and appearance, and the suppliers’ capacity and facility to supply Franchisee’s needs in the quantities, at the times, and with the reliability necessary for efficient operation. Franchisor may require that samples from any supplier be delivered to a designated independent testing laboratory for testing prior to approval and use. Franchisee will reimburse Franchisor for the actual cost of the tests. Franchisor will license any supplier, that can meet or exceed Franchisor quality control and confidential formula requirements and standards, for a reasonable license fee, to produce and deliver products to Franchisee but to no other person.

Franchisor confidential manufacturing requirements, equipment, designs, systems and formulas will be disclosed to potential suppliers only after Franchisor has received reasonable evidence that the proposed supplier is trustworthy and reputable; has the capacity to consistently adhere to Franchisor standards, requirements and testing procedures; will maintain the confidentiality of the designs, systems and formulas; and will adequately supply Franchisee’s reasonable needs. Franchisor will not unreasonably withhold approval of a supplier Franchisee proposes. Franchisor will notify Franchisee in writing of the approval or disapproval of any supplier Franchisee proposes.

From time to time Franchisor or their agents may inspect any approved manufacturer’s, supplier’s or distributor’s facilities and products to assure proper production, processing, packaging, storing, and transportation. Permission for inspection will be a condition of Franchisor’s continued approval of any manufacturer, supplier or distributor. Should Franchisor determine from any inspection that a manufacturer, supplier or distributor fails to meet Franchisor’s specifications and standards, Franchisor will give written notice describing this failure to Franchisee and to the manufacturer, supplier or distributor, together with a notice that unless the failure or deficiency is corrected within thirty (30) days, the manufacturer, supplier or distributor will no longer be approved.

All initial transactions with vendors must be negotiated by Franchisee prior to the opening of the Franchised Business. Franchisee must purchase the required items through Franchisor’s approved vendors and sources, have taken receipt of, installed in Franchisee’s mobile car wash truck/unit and have fully operational all required items within one hundred thirty-five (135) calendar days of signing the Franchise Agreement.

Franchisee will find all specifications for the initial equipment in the Confidential Operations Manual and the Franchisee Forum intranet system. If Franchisee does not have all required equipment ready within one hundred thirty-five (135) calendar days due to circumstances beyond Franchisee’s control, Franchisee agrees to borrow a loaner unit to start the Franchised Business if one is available and Franchisor offers it to Franchisee.

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Although our little franchising company was very simplistic you can see how important this issue was to us. Each franchising company needs to get with legal counsel and a competent franchise attorney to strategize how best to address this issue in the franchising agreement. So, consider this in 2006.