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.

The History of Franchising – The Creation of the Franchise Business

The franchise business has been around a long time, in fact they go back as far back as the 1850’s. The notion of selling off a business or a part of a business in order to expand into new areas usually came from the lack of investment funds from the business owner. Through their creativity they were able to keep the business alive by selling franchise opportunities to would-be entrepreneurs.

While the business of franchising has grown over the years it all had to start somewhere. The concept of franchise businesses began with none other than the sewing machine manufacturer, Singer.

The Singer Franchise Business Opportunity

In the 1850’s the Singer Company produced sewing machines but didn’t have enough capital to actually pay their salesmen salaries. Instead, they created a network of dealers. These first franchise owners paid Singer a fee to work in a particular territory and earned money for each sale of a sewing machine they bought from the company and resold.

Their significance in the start of the franchise and the opportunities it created came from the creation of the contract that is still used today between the original business owner and the new entrepreneur. Many feel the contract was what really sparked the creation of franchises in the future as it allowed business owners to keep some control over how the franchisees were run.

The Coca-Cola Company Franchise Business Opportunity

When Coca-Cola was originally created, it was only sold as a fountain drink. In 1899 two men obtained a short 600-word contract and the permission to bottle the soda.

Thomas and Whitehead soon realized that even though they had a great idea, they couldn’t afford to actually create a bottling company. As an alternative, they created a franchise company selling the right to bottle the product to individual bottling plants.

The KFC Franchise Business Opportunities

One of the most famous start-ups in the franchise industry was Kentucky Fried Chicken. The franchise opportunity began when Harlin Saunders, or the ‘Colonel’ was about to go under. His business started to fail when a highway was created seven miles away from his restaurant. With his business going under, Sanders had to find new ways to get his famous chicken to people.

When Sanders finally lost his business, he went practically door-to-door to sell his chicken recipe. His popularity improved with time and within a few years he had restaurant owners coming to him. He set up franchises and today there are over 10,000 KFC restaurants all over the world.

Companies Leading The Way For Franchise Business Opportunities

The establishment of KFC and others like it led the way for businesses to expand all over the world. It also gave the opportunity for new entrepreneurs to find the path to success. Many of KFC’s first franchise owners became millionaires. People who joined in with similar companies like McDonald’s also found success.

Thanks to these companies, we now have the opportunity to share in the success of other businesses and business owners have the opportunity to expand their dream. By reaching out to others, they can build a franchise empire out of a business opportunity.

Franchise Investing, Franchise Opportunities and Franchising Renewals

Have you considered buying a franchise instead of trying to start a business from scratch. Many franchise agreements are renewed every five or ten years, automatically. If you do not want to renew your franchise you need to let the franchisor know a little bit in advance as it generally states in the Uniform Franchise Offering Circular (UFOC) The franchise Disclosure Document used in franchising. Most require that you out it writing so there is no question about your intent, some require this 180 days before expiration. Others state that if you do not specifically say you do not wish to renew the agreement you are automatically renewed. If you do not want to renew your franchise at the end of the five year period, that is ok, but there are generally stipulations after termination. You cannot simply change the “Burger King Hamburger” sign out front to Joe’s Burgers and keep operating (example only).

You can decide not to renew but many franchise attorneys might suggest rather than just not renew; that you transfer your franchise to a new buyer and get the money out of your business that you deserve for building up the franchise. Example: If you have built up your business and you are doing one million dollars a year, just under 100,000 dollars a month, finding a buyer should not be a problem. Then you would be compensated for building the business up to that point or maintaining it at that level. Many businesses sell for a multiple of of their gross sales and a business broker can give you an appraisal. If your business is small and lets say doing one hundred thousand dollars gross a year, you may wish to sell your business for an additional fifty thousand dollars above and beyond the value of your equipment. In other words, whatever the equipment is worth plus fifty thousand dollars. (example only).

The franchisor may help you find a buyer or you may find a buyer yourself, sometimes the franchisor may charge you a fee from renewal and this is quite typical as they have real costs of screening and training the new franchisee. But you need to understand that not renewing your contract will cost you money. You will lose your original investment. At the end of five years if you have run your business exactly how we have shown and you qualify for renewal, but you decide you do not want to run your business anymore, the franchisor may be glad to buy your business at a fair price or make you and offer. Some franchise agreements require that the franchisor has the first right to purchase or first right of refusal, some require both.

Of course if you don’t follow the franchisor’s confidential operations manual and continually violate the standards of the franchise you will not qualify for renewal at all, you might be terminated completely and not able to sell your business, which in franchising we call transfer, because you do not actually own the business, you are basically leasing it and using your business acumen to derive an income for your hard work in promoting the franchisors brand name.

Before you buy a franchise consult an attorney so you know what you are buying, even though most attorneys are considered scoundrels and parasites of our great nation as they steal the productivity from America and produce nothing in return; causing a complete melt down of our great civilization while destroying all we are and all we have built. Think about it.