Are you considering expanding your retail brand internationally?
A retail brand (franchisor) may consider several franchise development models for its international expansion.
The most frequently used international franchising development models are:
- Master franchising model
- Area development/multi-unit operator model
- Direct unit franchising model
- Area representative franchising model
- Joint venture franchising model
Master franchising model
Master franchising is one of the most common business models used in international franchise expansion, as it carries the potential of a rapid expansion of a brand in the development territory without the ongoing commitment of human and financial capital that would be required in other franchising models such as direct unit franchising and area development/multi-unit operator models.
In a master franchise agreement, the franchisor grants the master franchisee the right to develop the brand within the development territory by licensing the right to establish and operate sub-franchise stores/units in that territory. The master franchisee assumes the role of the franchisor in the development territory (foreign market ) in relation to the sub-franchisees, including providing training and support as well as all day-to-day administrative duties. The development right is usually limited and provided for development milestones or performance standards over the course of the agreement term, which may be measured against various yardsticks such as gross revenue or number of units/stores opened and operating.
Master franchisees are often required to own and operate a number of "pilot" units/stores directly or through an affiliate before they may sub-license the franchises to any sub-franchisees.
In the master franchising model - as opposed to the other international expansion models - the franchisor has no direct contractual relationship with the sub-franchisees as the sub-franchisees enter into sub-franchise agreements directly with the master franchisee.
Area development/multi-unit operator model
Under the area development/multi-unit operator model, the franchisor and a local company (the "area developer/multi-unit operator") will enter into an area development/multi-unit franchise agreement which entitles and requires the area developer/multi-unit operator to develop, open and operate a specific number of franchise units/stores during the development term in the development territory.
The area developer/multi-unit operator will most often be granted exclusive development rights within the development territory, provided that the area developer/multi-unit operator is in full compliance with the development plan (schedule with minimum number of new units/stores annually). Typically, the area developer/multi-unit operator pays a territory reservation fee for the grant of the exclusive development rights.
As opposed to the master franchising model, the area developer/multi-unit operator will have no right to sub-franchise, and the area developer/multi-unit operator or a 100 %-owned affiliate of the area developer/multi-unit operator must develop and operate all the franchise units/stores as set out in the agreed development plan.
Direct unit franchising model
Direct unit franchising concerns the direct grant of a unit franchise agreement by the franchisor to a unit franchisee without any master franchisee to help with the fulfillment of the franchisor's obligation to the unit franchisee. The direct unit franchising model provides the franchisor much greater control over the unit franchisee than under a master franchise agreement.
Franchisor retains all fees generated by the unit franchisee without the necessity of having to share a portion of the fees with a local master franchisee. The franchisor however bears all of the costs associated with supporting the unit franchisees and all enforcement costs in the event of the unit franchisee's non-compliance. There are also large indirect costs and expenses as the franchisor has no local master franchisee to advise on how best to adapt and implement the franchise system in the development territory.
Area representative franchising model
Under an area representative franchising model, the franchisor, through an area representative agreement, delegates certain pre-sale obligations to an area representative. The area representative markets the franchise system and looks for potential franchisees in the development territory, and often when operating with an area representative franchising model, the area representative also helps the franchisor in relation site selection, training, inspections and ongoing support.
In an area representative franchising model, the franchisor will sign two separate agreements: an area representative agreement with the area representative and a unit franchise agreement or an area development agreement/multi-unit operator agreement with the franchisee who will develop the units/stores.
There is no direct contractual relationship between the area representative and the unit franchisees, which is the most significant difference between the area representative franchising model and the master franchising model.
Sometimes, the area representative is granted exclusive rights within the defined development territory, however always subject to any rights reserved by the franchisor under the area representative agreement, in exchange for the area representative adhering to a specific development schedule in the development territory.
Joint venture franchising model
Under a joint venture franchising model, the franchisor will invest directly in a joint venture entity with a local partner and then the franchisor will enter into an area development/multi-unit operator agreement or a master franchise agreement with the joint venture entity. The franchisor often holds a minority interest in the joint venture entity and the local partner will hold the majority interest. The franchisor will often - regardless of being a minority owner - hold certain rights in relation to the joint venture entity that will allow the franchisor to impact the operations, and the franchisor will also have its contractual rights as franchisor under the agreement between the franchisor and the joint venture entity (franchisee).
The joint venture franchising model is often used in situations where the local partner would like the franchisor to show some commitment to the development territory by making a direct cash investment in the joint venture entity. The franchisor may exit the joint venture entity by selling its interest to the local partner after the first franchise units/stores have been developed and local support systems have been completed.
The joint venture franchising model may also be used in situations where the franchisor wishes to have more control over or secure a direct interest in the earnings generated by joint venture entity (franchisee) operations but does not have the resources or expertise to operate the market entirely on its own. In such event, the franchisor may keep its investment in the joint venture entity for a longer period.
Please contact the Franchise team here at Plesner if you would like to know more about each of the international franchise development models or if you would like to hear more about the advantages and drawbacks of each model.