As an experienced franchisor, expanding your brand through a master franchise arrangement can be an exciting opportunity to penetrate new markets and territories. However, granting a master franchise requires careful planning, negotiation, and drafting to ensure both parties are clear on their rights and obligations. The framework of the deal is typically outlined in a Heads of Agreement before the Master Franchise Agreement is prepared. Below are the key points to consider when negotiating a master franchise deal.
1. Term: Longer Than a Sub-Franchise
Master Franchise Agreements usually have a longer term than standard sub-franchise agreements. It’s common to see terms of 10 + 10 + 10 years. The rationale behind this is the significant investment of both time and resources by the Master Franchisee to develop the territory. Ensure that the term is long enough for the Master Franchisee to grow the brand while also allowing flexibility if the relationship doesn’t go as planned. It’s crucial to get this right in the early stages, as a well-defined term ensures both parties have clarity over their long-term commitments. Having numerous renewal terms means the Master Franchisor is afforded the opportunity to effectively end the relationship if the Master Franchisee is not performing and, for this reason, is generally more appropriate than one single very long term, particularly when the Parties have not previously dealt with each other.
2. Fees: Initial and Ongoing Fee Splits
Fees are an important factor when drafting a master franchise agreement. While the initial master franchise fee is typically paid upfront, the revenue sharing between the Master Franchisor and Master Franchisee is ongoing. This split often covers fees paid by sub-franchisees. These include the initial franchise fee, ongoing franchise fee, marketing fund contributions and other regular payments. The percentages that apply will depend on the financial model for the master territory, and this needs to be carefully mapped out and negotiated. Ensuring both parties understand the breakdown of all fees and their respective shares is critical for avoiding future disputes. A well-structured fee arrangement ensures profitability for both parties.
3. Development Schedule: Hitting Milestones
The development schedule is a vital part of any master franchise deal. It sets out the number of units the Master Franchisee is required to open each year. Meeting these milestones is generally tied to two key rights: ongoing exclusivity within the master territory and the right to renew the agreement at the end of each term. It is essential for the Master Franchisor to ensure the schedule is realistic but also ambitious enough to achieve the desired growth. If the development targets aren’t met, the franchisor often reserves the right to either terminate the agreement or revoke exclusivity. Drafting this schedule correctly ensures the long-term success of the master franchise.
4. Supply Chain Considerations: Adherence and Adaptation
Supply chain control is another critical area to address. The Master Franchisee may be required to adhere to pre-existing supply chains already in place for other regions, particularly for maintaining brand consistency and quality. However, geography and freight logistics will likely impact how supply chains work in different territories. The Master Franchisor needs to clearly outline the expectations for sourcing, manufacturing, or distribution within the master territory. Failure to address this upfront can lead to operational difficulties or conflicts between the parties. The contract should clarify whether the Master Franchisee has any discretion to adapt the supply chain in their territory.
5. Reporting and Feedback: Setting the Right Level of Control
Reporting requirements in a master franchise agreement are more extensive than those in sub-franchise agreements. The Master Franchisor needs to carefully consider how much control they want over the operations in the master territory. This includes approving new sites, reviewing sub-franchisee applications, handling complaints, and tracking performance. Balancing oversight with allowing the Master Franchisee the autonomy to manage day-to-day operations is key. Too much oversight could stifle the Master Franchisee’s ability to grow, while too little could result in brand damage or quality control issues. Ensuring the right level of reporting is included in the agreement will prevent headaches down the track.
6. Termination: What Happens to Sub-Franchisees?
Termination is an area that requires clear drafting in any master franchise agreement. Often, when a Master Franchise Agreement is terminated, the sub-franchise agreements automatically assign or novate to the franchisor. This ensures continuity of the brand and protection of the sub-franchisees. However, this isn’t mandatory, and both parties need to discuss the post-termination process during negotiations. Whether or not to include this provision should depend on the structure and future plans of the franchise network. Including a clear termination clause helps protect the franchisor’s business interests. It also ensures the long-term stability of the brand within the master territory.
Conclusion
Entering into a master franchise agreement offers franchisors an effective way to expand their brand into new territories. However, success relies heavily on how the agreement is drafted and the framework negotiated. Key areas such as the term, fees, development schedule, supply chain adherence, reporting obligations, and termination provisions all need to be clearly addressed in the Heads of Agreement and the final master franchise agreement.
By carefully considering these factors, and working with an experienced franchise lawyer, you can ensure the foundation of your master franchise arrangement is solid, protecting both the franchisor’s interests and those of the Master Franchisee. Clarity and fairness in these early negotiations are critical for long-term success. Ensure you are taking these points into account when drafting your master franchise agreement to build a sustainable and mutually beneficial franchise relationship.