​14 Questions a Master Franchisee MUST Ask

Posted 29/03/2017 : By: Debbie Dennis

This article offers an interesting take on Master franchising written very much from a US based stand point in particular so we recommend any reader wherever in the world they may be to take advice from local consultants....

Before signing that master franchise agreement, be certain that you can answer these essential questions, says Adam G. Wasch

1 How much will a master franchise agreement cost me?

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.

2 What is my specified territory and is it exclusive?

The master franchise agreement will specify the boundaries of the territory. The specified territory needs to be accurately defined and typically will include an entire country or countries. The master franchisee should seek exclusivity ensuring that the franchisor will not own or operate a franchise, or grant to anyone else the right to own or operate a franchise, during the term of the master franchise agreement in any territory covered by the master franchise agreement.

3 What is my development schedule?

The development schedule imposed by the franchisor can be where the master franchisee/franchisor relationship falls apart. The franchisor will often push for an aggressive, oftentimes unrealistic, development schedule. Should the development schedule not be met, the master franchisee could be subject to default and termination and monetary penalties to the franchisor for non-compliance. What often occurs is that a master franchisee will sell sub-franchises to under-qualified sub-franchisees in order to meet the development schedule, which then compromises the franchise system on the whole. Master franchisees need to perform due diligence into the growth capability of the franchise concept and negotiate when possible a less aggressive and more realistic development schedule.

4 What are my responsibilities as master franchisee?

Master franchisees are 'mini-franchisors' in their respective territories. The master franchisee is tasked with the obligation to protect the franchisor in the territory among the myriad of obligations required of franchisors including, but not limited to, adhering to the development schedule by signing sub-franchise agreements, finding and signing up sub-franchisees, training sub-franchisees, ensuring compliance with the sub-franchise agreement including royalty payments, developing a marketing strategy, maintaining quality control, and general support of the sub-franchisees. The master franchise agreement should lay out all of these requirements.

5 How much money will I earn for my efforts?

The master franchise agreement will specify how much of the initial fee and ongoing royalties will be earned by the master franchisee and how much the master franchisee must pay the franchisor. The typical arrangement will be 50/50 but it varies and may be negotiable.

6 What level of training will I get from the franchisor?

It is incumbent on the master franchisee to learn and understand how the franchise system operates. The master franchise agreement will likely require that all key employees of the master franchisee including the CEO, COO, CFO, human resources director, director of training, and the chief marketing officer be adequately trained on franchise operations. The franchisor will offer master franchisees initial training classes on the elements necessary to operate a franchise but it will be the master franchisees’ obligation to provide initial and ongoing training to the sub-franchisees. One key factor to consider as a master franchisee is the cost of training, which could be substantial depending on where training will be held and if there are multiple key employees.

7 What is the term of the master franchise agreement?

The terms of the master franchise agreement will be set out in the agreement. Master franchisees should consider the amount of time it will take to establish brand recognition for lesser known franchise systems, which makes shorter terms generally less desirable for international master franchise agreements. Conditions of renewal will also be contained in the master franchise agreement and, if renewal is an option, may require the master franchisee to not be in default in any respect, and may include the signing of a general liability release for prior actions of the franchisor.

8 Does the brand have recognition in my country and what would be the barriers to establishing brand strength?

Brand strength and recognition is one of the pillars of a healthy franchise system. It would be prudent for a master franchisee to perform due diligence into whether an emerging or less-established franchise concept which may be successful in one country would make sense and find success in the master franchisee’s territory. Other factors that could be barriers to establishing brand strength might be cultural differences, unexpected competition, differing legal systems or bureaucratic problems and delays.

9 Where is the product to be sold coming from?

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.

10 Who is responsible for advertising in my Territory?

The master franchise agreement sets forth the parameters of who is responsible for advertising, marketing and related activities. The master franchisee will likely have the obligation to develop and implement a marketing plan for each territory. The franchisor will either require or reserve the right to review and approve the marketing plan and any materials used for advertising purposes.

11 Is there flexibility for the master franchisee to negotiate terms of the sub-franchise agreement?

Not really, but it could be said that there is no money in master franchising if there are no sub-franchises being sold. Look for language in the master franchise agreement that might state “unless otherwise agreed by [insert franchisor], the initial franchise fee shall be...” This indicates that there may be a procedure in place by which the master franchisee could sell franchise units at a lesser initial fee if necessary. Any possible flexibility has to be negotiated with the franchisor prior to the time the master franchise agreement is signed.

12 Is there a way out of the master franchise agreement?

There are two ways out of most franchise arrangements: transfer of rights to a third party approved by the franchisor or the default/termination provisions of the master franchise agreement. The master franchise agreement should include the specific transfer criteria imposed by the franchisor. A default by a master franchisee is good for no one but often necessary. Default will generally occur if the master franchisee breaches any material term of the master franchise agreement and fails to cure the default within a certain period of time. There may be automatic termination provisions in the agreement, as well for reasons that include insolvency or bankruptcy of the master franchisee.

13 What law applies to the master franchise agreement?

It should be no surprise that a United States-based franchise system will require that the master franchisee adhere to the local substantive law of the state in which the franchisor is headquartered. For example, McDonald’s master franchise agreements are governed by the laws of the State of Illinois. Because the transaction is international, the master franchise agreement may incorporate, where applicable, international laws including the United Nations Convention on Contracts for the International Sale of Goods (CISG).

14 How are disputes over the master franchise agreement going to be resolved?

Master franchisees need to be aware of their rights if a dispute arises with the franchisor. A typical master franchise agreement will have an arbitration requirement, whether pursuant to American Association of Arbitration (AAA) Rules or the arbitration rules of the International Court of Arbitration of the International Chamber of Commerce (ICC). The agreement may allow leave for the franchisor to go into court to obtain injunctive relief where a master franchisee or sub-franchisee goes “rogue.” Whether the dispute is resolved in court or through arbitration, it will be expensive.

ABOUT THE AUTHOR

Adam G. Wasch is a founder and shareholder of Wasch Raines LLP, a franchise and business law firm based in South Florida. Adam’s law practice focuses on franchisor and franchisee general representation, franchise litigation in court and arbitration, and startup franchising. Adam has been selected by Super Lawyers as a Rising Star in Franchising, and he is a member of the ABA Forum on Franchising. Adam is also a founder/owner of Franchise Formations, LLC, which focuses on establishing international startup franchises.

This article appeared in the international franchising section of globalfranchisemagazine.com

© 2017 Aceville Publications Ltd

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