Master Franchise Agreements And International Supply Chains

With the recent election of Donald Trump those of us who don’t know much about free and fair trade are learning about it from our nightly cable TV news. Trump explains that it is unfair when we allow products into US markets with no duty or tax, but then those same countries like China or Mexico put a 45% tariff on our goods. No one probably understand this better than an International Franchisor – someone who sells franchises or master franchise license agreements globally. I can remember when I was negotiation the sale of a master franchise for my company in Mexico. My franchise buyer was in Monterrey, Mexico. The family was well-connected with the government there and had many distributorships and license agreements with major US companies already – Auto Dealers, Truck Dealers, Tractor Dealers, Soda Pop, etc.

It seemed perfect, however as we got to talking about the cost of the master franchise and the requirement to operate at least one actual unit – for training purposes, etc. – I quickly learned that I would have to pay the import duties or charge those to the buyer. This immediately added costs. It became an additional burden for the master franchise because, each time he sold a franchise, the franchisee would have to get their equipment from the US, also at a 45% import duty, drastically raising the price of the franchise and hurting their chances for a quick positive ROI.

We therefore had to come up with some sort of manufacturing there in Mexico to sell into that market, but in doing so, I risked giving away all the technical plans of the equipment which made it unique to our franchise company – and that’s a lot of hard won intellectual capital, not in the sense of patents mind you, but in real terms, trial and error, development and weeding out what didn’t work in the evolutionary changes and upgrades along the way.

Interestingly enough, now 20-years later, the 2016 December issue of Global had a brilliant article; “The Fourteen Questions a Master Franchisee Needs to Ask.”

The article questioned; “Where is the product to be sold coming from?” and stated; “The franchisor will mandate that the quality standards established in its domestic country be properly maintained by the master franchisee and sub-franchisees. That requires a protocol for the franchise system in every Territory to obtain access to the same products and/or services being sold to retail customers. The franchisor may supply product to the master franchisee or sub-franchisees but, more likely, the obligation will be on you, the master franchisee, in the foreign country to access local distributors and get the distributors approved by the franchisor.”

Indeed, it was about quality, intellectual capital, and availability of supply. It turned out at the time, I wasn’t willing to adjust my master franchise agreement to accommodate such changes, it wasn’t until I was more well established some 5-years later that I took the risk and worked through the trade issues and figured out how to deal with our supply chain. Please consider all this and think on it.