In the last issue of the KASS IP exposé, we touched on the IP considerations that master franchisees need to think about before investing in a foreign franchise. Once you have ensured that the IP rights in the franchise are properly taken care of, the next pressing issue to consider would naturally be finances!

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Typically, the fees that arise when purchasing a franchise are:

  1. Upfront  franchise  fee:  This  depends  on  various factors, e.g.: Is the principal an established franchisor? What is the track record of the franchises held by the other franchisees? Is the brand well-known? Master franchise fees will definitely be much costlier than individual franchises as the principal, by awarding a master franchise, gives exclusive rights to one party to expand the franchise business in a specific region. Until the agreement is terminated, the principal can no longer offer franchises to any third party in that region.
  2. Periodic payments: In exchange for the use of the principal’s brand, a royalty fee will be paid either as a lump sum or based on sales or both, where a minimum lump sum fee is paid, followed by a certain percentage on top of the turnover earned by the business.
  3. Cost of premises: Generally, franchisees will receive guidance on how to choose a location that is right for the type of business carried out and the franchisor will provide advice on the construction of the premise for the franchise. However, the cost to rent, construct or renovate the premises will be borne by the franchisee.

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  4. Other costs: Cost to equip an outlet, purchase initial inventory, operating license, insurance, furniture and anything else required to make the outlet operational will be additional cost to the franchisee.
  5. Advertising and Promotion (A&P) cost: Most franchisors require a percentage (usually 2%) of the turnover from each outlet to be paid to the franchisor as A&P fees. This is regardless of whether the advertising is targeted to the franchisee’s individual outlet. This payment may be used by the franchisor in their annual international A&P budget. 

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  6. Training: Payment may be required for the regular training of managers and staff in the franchisee’s business and for training materials. Cost may include fee to transport the principal to the country from wherever they reside, accommodation and meals.

Using McDonald’s as a case study, entrepreneurs intending to be master franchisees can get an idea of the investments needed to obtain a franchise for a famous brand. The cost for starting an entirely new McDonald's restaurant in Malaysia can be anything between RM2 million to RM4.5 million, based on factors such as the restaurant size and type, location, décor and landscaping. The breakdown of the cost can be found at  www.mcdonalds.com.my.

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Of course, not all franchises are as costly and the initial investment differs according to the type of the business and the value of the brand in the franchise. Extensive research should be carried out before a foreign franchise is purchased and if the principal has franchisees in other regions, visiting those outlets would be useful to get an idea of the challenges involved in carrying out the franchise and the genuineness of the principal with whom you will be dealing throughout the business relationship.