Master franchise agreement
A master franchise relationship is where a Franchisor from Territory A (e.g. USA) grants to a master franchisee the right to grant franchises to franchisees within Territory B (e.g. United Kingdom) (i.e. the right to sub-license). In this event the master franchisee is itself a franchisor for Territory B rather than a franchisee.
The franchisor (in Territory A) will train the master franchisee how to carry on the franchising business (e.g. how to recruit franchisees). The franchisor itself may train the franchisees recruited in Territory B by the master franchisee to carry on the franchised business (e.g. selling hamburgers). Alternatively the franchisor may train the master franchisee how to train its own franchisees to carry on the franchised business.
The financial and business structure of a master franchise will typically involve the following:
1) An initial master franchise fee: The amount is for negotiation. Initial master franchise fees range from £1.00 to £1m plus.
2) Monthly master franchise fees: Typically these might involve a sharing with the franchisor of the initial fees paid by franchisees to the master franchisee and of the monthly service fees (e.g. 10% of gross turnover) paid by franchisees to the master franchisee. Again the amounts are for negotiation (and may depend on the size of the initial master franchise fee) and range from 50/50 to nil.
3) So that the master franchisee can be kept on his toes it is usual to provide minimum performance targets. There should be both annual and cumulative targets. There will be provisions for termination or loss of exclusivity if the minimum performance is not reached. Alternatively there may be provisions for the master franchisee to make payments to the franchisor of the same amounts as would have been payable to the franchisor if the minimum performance targets had been met instead of termination or loss of exclusivity.
4) The term of a Master Franchise Agreement is likely to be 10 or 20 years with renewals.
5) It is usual to grant exclusivity within the target Territory.
6) The franchisor is supporting the master franchisee in the master franchisee’s operations as a franchisor. It is up to the master franchisee to support his franchisees in respect of the franchised business.
7) The Master Franchise Agreement should stipulate the form of Franchise Agreement to be used. It will be necessary for a local lawyer to confirm that the Master Franchise Agreement conforms with local law and will be fully enforceable in the target country.
8) It may be necessary to translate the franchisee’s manual. The master franchisee should advise whether any amendments or refinements are necessary to conform with local laws, practices and/or customs.
9) Other usual terms in an Master Franchise Agreement include ongoing support, rights of termination, consequences or termination, choice of law, intellectual property clauses, confidentiality, currency, exchange control (if relevant), sale provisions and internet and intranet clauses.
Author: ©David Bigmore Limited 2010
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