A master franchise contract is an official document that allows a franchisor to expand their business by allowing someone else to open and run franchises in a specified area. The master franchisee acts as a regional franchisor in that area to assist, support, and monitor compliance with the brand by all of the franchisees in their area. This is a common method for international businesses looking to enter new markets quickly, utilizing the talents of local people in the brand’s distribution.
What Is A Master Franchise Contract?
The master franchise contract is a written contract between a franchisor (the brand owner) and a master franchisee, granting the rights of franchising in a specific area or region. The master franchisee has the authority to develop and expand the franchise system through the following activities:
- Operating multiple locations of the brand.
- Identifying and approving additional franchisees for the region.
- Providing training and support for new franchisees.
- Collecting franchise fees and royalties from new franchisees, with an agreed-upon split between the master franchisee and the franchisor.
Often, the master franchisee will take on many of the functions of the franchisor by assuming the role of “sub-franchisor” for those franchisees in their territory.
For international franchising, using a master franchisee model helps the franchisor to utilize a local partner’s knowledge of the market, culture, laws, and consumer behaviour in developing the franchise system.
Key Elements Included In A Master Franchise Contract
The Master Franchise contract specifies many clauses that can significantly affect the relationship between the franchisor and master franchisor. These clauses are not only important for protecting both parties, but also help complement the efficient operation of the franchise system.
1. Territory Rights
A critical term in the contract is the territory clause. This term identifies the geographic area where the master franchise will have either an exclusive or non-exclusive right to develop the brand.
The master franchise will also have the right to develop franchises and to recruit additional franchises in the territory. To promote the long-term commitment required from the master franchise to invest in marketing, training, and developing a long-term brand within that territory, many times the agreement will provide that no other franchisees will be allowed to use those rights in the territory.
2. Development Responsibilities
The majority of master franchise agreements cover a timeline for developing franchises, including a designated amount of time to complete opening these locations by the master franchisee. For instance, in the first two or three years of operation, the agreement will specify how many units the master franchisee has to complete opening. If these obligations are not met, the franchisor typically will reduce territory or end the agreement.
These obligations are to ensure both that the brand continues expanding as originally planned and that the master franchisee is actively working towards developing their territory instead of merely holding onto their right to develop.
Financial Structure And Fee Arrangements
There are many elements of a master franchise contract that involve finances. Most of the time, there are three major types of payments involved with these agreements.
- A significant monetary investment is to be made by the master franchisee to the franchisor, in return for the master franchisee having the right to build out the brand within a defined territory. This payment occurs prior to the franchisee commencing any activities to develop their respective amendments to the brand or franchisor’s overall business model.
- Another type of payment is the ongoing royalties that the master franchisee pays to the franchisor on an ongoing basis after the franchisee has paid the initial master franchise fee. The franchisor receives ongoing royalties based on a percentage of total sales generated each month by franchises located within the territory selected by the franchisee.
- The master franchisee gets to keep some or all amounts payable by their sub-franchises as outlined above to assist in generating profits from their respective franchises up until the time they become profitable.
Roles And Responsibilities Of The Master Franchisee
A master franchise contract specifies the duties of the master franchisee. As the brand’s local representative, the master franchisee’s job involves much more than running a location for the franchisee.
The master franchisee has multiple key duties, including:
- Recruiting and approving franchisee candidates within the territory;
- Training and supporting new franchisees with the operation of their franchises and all required training to operate their franchises successfully;
- Ensuring all franchises maintain the franchise’s quality standards and comply with any franchisor operational requirements;
- Promoting and advertising the franchise in their designated territory;
- Assisting franchisees in addressing and resolving operational issues and identifying strategies for business growth.
In order to successfully perform all of these responsibilities, master franchisees typically are entrepreneurial or a company that has extensive financial resources and knowledge of the marketplace.
Conclusion
The master franchise contract allows franchisors to grant permission to master franchisees for the purpose of allowing those individuals to develop a chain of franchised outlets in different parts of the world. In this way, the franchisor benefits from accelerated growth opportunities as well as access to locally-based experts to help them grow. At the same time, the complexity of Master Franchise Agreements includes a number of different areas of law, financial obligations and requirements, and operational responsibilities that both the franchisor and master franchisee must examine in detail and with legal advice before engaging in these transactions.
