Your Guide to Buying a Master Franchise

If you consider franchising as a gateway to success, then you are never wrong with that idea. Everything is just a matter of how well you do as a franchisee and how dedicated your franchisor is in the business.

In the beginning, everything about franchising in the Philippines is challenging. You need to understand pieces of information at once and make them work in the best interest of your chosen franchise.

Starting from the basics of franchising to its types of arrangement, you need to be a versatile individual. Deciding whether you must acquire an area or multiple franchise unit is always an option, but how about adding a master franchise on your list?

Sounds overwhelming? Well, do not be too intimidated because this guide about buying a master franchise will make you feel at ease when dealing with master franchises.

What is a master franchise?

In a master franchise, the franchisee directly applies to the main franchisor (owner) of the business, who is usually a foreign entity. This is because the master franchise is an option for most foreign companies that want to offer franchises internationally.

If granted permission, the new franchisee has the overall command in a certain territory (country) to open its franchise units and sub-franchise to another interested franchisee in the same area.

Master Vs. Area or Multiple Franchise Units

Many big companies from the United States of America (USA), Canada, Europe, Australia, and other countries always give a promising chance of offering franchise options internationally. In this way, international brands can gain brand recognition worldwide.

The main difference between a master franchise and an area or multiple franchise unit is the ability to offer a sub-franchise option to other franchisees. Only the master franchise can allow sub-franchise offers, although both can open several units in their respective areas.

Becoming a Master Franchisee

If you opt to own a master franchise, you are considered a master franchisee. The master franchisee pays the franchise company a hefty initial fee for the rights to develop the territory. Such a franchisee retains most of the overall initial and royalty fees paid over time by the sub-franchisees in the territory.

As the main franchisee, he or she is responsible for finding possible individual franchisees within the territory, and provide them with all the training and support they need. It should be on an ongoing basis and not only limited to the initial activities they must learn at the beginning of the operations.

In a master franchise, you need to investigate both the franchise company and its master organization thoroughly. It is the only way that you can have a better understanding of how it works and what it takes to become a grandmaster franchisee.

Is master franchising beneficial for companies and the franchisee?

Often, franchise companies choose this approach for faster expansion than the usual system. They believe that there is more rapid system growth here but with less initial capital risk for the company.

As a franchise buyer, you can always choose to avail of the master franchise option, although going direct is not bad at all. Remember that each strategy can be useful or not, and relies upon most with your ability as the franchisee.

Therefore, it is somehow beneficial to both parties if handled properly, especially that master franchisees have this power to grant sub-franchise to other prospect franchisees.

The Importance of Established Business Model

As part of the basics, you start with a question, how to start franchising in the Philippines, and then from there, you explore the other important matters to start the business.

Evaluating the importance of the business model is necessary because it makes you prepared and set your expectations right. If a franchise system that does not have a reliable and robust business model, no matter how great you are, you end up losing in the end.

Every business concept has significance in the market. It is just a matter of how you handle things following a franchise business plan and model that is tested in the market. However, even if you have the best franchise model, if you are inefficient, it will never be the best master or even direct franchise.

Master Franchise Essentials: Franchise Disclosure Document (FDD) and Franchise Agreement (FA)

Just like any other investments or business ventures, there are necessary documents that are binding and effective during the duration of the business, aside from the existing regulations implemented in a specific country.

When franchising in the Philippines, there are specific mandated laws that help in the franchising regulation in the country. Yet, these do not go handy as FDD and FA also play significant roles in making the business run smoothly and legally.

FDD aims to describe the relationship between the franchisor and franchisee. It also provides the franchisee the needed information to understand the franchisor and his or her offer. Usually, it is a stepping stone for the prospective franchisee in researching the given opportunity.

On the other hand, FA is the written and binding contract between the franchisor and franchisee. Technically, it legally governs the relationship between franchisor and franchisee in all aspects of the franchise duration.
Hence, it is crucial, especially for a master franchise, to have these documents as they are powerful enough to back you up in case untoward incidents happen.
 

Understanding the United State’s Uniform Franchise Offering Circular (UFOC)

If, in any case, you consider franchising a business that is based in the US, take into consideration first on learning what UFOC is all about.

The USA law requires every franchisor to deliver a UFOC or FDD to its prospective franchisees in the United States before they pay any money or sign any binding agreement. The FDD has 23 “items” which contain information under three broad categories:

  • Facts about the franchisor and its history
  • Details about the terms of the deal
  • Information about the franchisor’s system

It is also common for the franchisor to fit the FDD based on what are the relevant clauses to a proposed international development transaction. However, other franchisors provide the FDD for domestic franchising in the USA without modifying its contents.

There are also times that there is no FDD provided to developers at all, which is not the best practice. Also, if the franchisor will not change its content, it will technically bear all the applicable provisions in the US market and not for a Philippine-based franchisee, for example. 

Hence, if you are here in the Philippines, this may be substantially different from the terms of the proposed development agreement and can hinder proper operations here in the country. The bottom line is for you to double-check FDD first before embarking on the business.

The Role of an Area Developer

If you are interested in the area or master franchise, you must understand what is an area developer first.

In layman’s term, an area developer is also a franchisee who has the right to expand a region by either appointing sub-franchisees or managed outlets. Often, he or she is an experienced franchisee who applies as an area developer and agrees to open a certain number of units by a specified date in a given area only where they have exclusive rights.

Commonly, many franchisors in the US engage in master and area development franchising only for international transactions. In this case, they must comply with a customized FDD that covers provisions that are applicable in the Philippine market.

In any case, a foreign franchisor may not comply with this request, but it is still accepted, and the developer can always examine it and discuss modifications for international transactions. It even contains detailed and valuable information about the franchisor, its history, and its system.

Even though the information describing the deal may not provide significant relevant information, it may still be used as a benchmark that the developer can use to compare the deal being offered.

Remember that FDD has highly technical legal requirements, and unless the reviewer has enough experience in reviewing the document, it may be impossible to analyze it comprehensively.

Moreover, it is essential to understand what the FDD is supposed to disclose and its contents. This applies not just for US-based companies but in other international companies that plan to expand the business worldwide. 

Without an in-depth knowledge of the disclosure laws, the developer may overlook possible red flags. In other words, ask assistance as much as possible, especially legal advice to guide you throughout the negotiation.

Conclusion

In the end, franchising in the Philippines becomes complicated when matters involving the other types of franchise arrangements come in.
It is never easy to handle, but with adequate information and advice, any franchisee should be able to fulfill this dream. Over the years, franchising in the Philippines remains booming, and while others may have other options other than franchising, it is still a promising business venture.

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