A master franchise agreement is a type of franchising agreement in which the franchisor (the proprietor of the brand name) gives up the control of the franchising rights in a designated territory to an individual or entity, called the master franchisor, whereby the franchisor grants the master franchisee the right to own and work more than one unit and the right to sub-franchise the right to open units to other independent businesses (called franchisees) during a specified time and within a designated area.
Have you ever wondered how franchisees interact with their franchisor? Mostly, franchises pick one of two different ways for providing sales and support services to franchisees: Directly by the franchisor to the individual franchisee (called direct franchising) or via a master franchising. In this article, we will know more about the master franchise system and how to draft a crisp and concise master franchise agreement.
Master franchise agreement comprises three participants:
Master franchising is all the more used for international operations. For instance: if a current USA-based franchise wishes to venture into another country, they could sell the Master Franchising rights to say, India or anywhere else in the world. A master franchisee basically becomes a franchisor themselves and will start to create and sell unit franchises within their territory. The franchisor grants the master franchisee rights to franchise and license to:
Master franchising is advantages to both parties here, is the reason:
With the right brand and right individual, master franchising can be a mutually gainful opportunity. Every franchisor has varying roles and responsibilities for the master franchisee, so consider specifically what is expected of you and ensure it is something that lines up with your goals and background and your abilities. Also, pay additional focus to the length of the agreement and what happens after the termination of the agreement.
Below we offer a checklist of boilerplate/standard clauses they typically included in a master franchise agreement:
This part provides data on core issues in such a way that it elucidates the key components of the agreement, clearly reflecting the intention of the parties getting into the agreement. As such Preamble can give the contextual clarity of the entire agreement which is to be interpreted and can fill in as the reference tool if the dispute arises. The following key components are recommended to be incorporated:
This Agreement is made on ____ day of ____
BETWEEN ____ whose registered office is at Canada (hereinafter referred to as the “ Franchisor ” and ____ whose registered office is at India (hereinafter referred to as “ Master Franchisee ”)
The typically shared objective of the agreement will be to additionally develop the franchise system in designated territory and to make this conceivable by franchisor conceding the master franchisee the right to utilise the franchise system, a trademark licence, and the license for the exploitation and use of any other Intellectual Property Rights and to grant franchises to sub-franchisees within the specified limits provided for in the agreement.
The geographical area that is assigned to the master franchisee should be characterised clearly. Contingent upon the attainment of clearly set targets, either in terms of turnover or the number of sub-franchise units opened or a combination thereof, the parties can opt for the expansion or reduction of the territory appropriately.
In return for the investment, the master franchisee is to make for the advancement of the franchise business in the designated territory, they would want to be granted exclusivity for that designated territory. Typically, it means the master franchisee has the unlimited right to franchise the business in the designated territory to the exclusion of any outsider including the Franchisor itself if there is no limit made in regards to the exclusivity.
Master franchising agreements will incorporate a development schedule enlisting the advancements of the number of franchise units to be opened in the designated territory. It is advantageous for both of the parties involved to approach this subject in a practical way in order to keep the disputes minimal. The agreement ought to provide solutions for the circumstances where realistic minimum developments are not acquired (e.g. restricting the scope of exclusivity granted for the agreement termination).
To secure the franchisor’s Intellectual Property Rights and keep up the common identity and reputation of the franchise system the master franchisee will use the best undertakings to open, through its franchisees , at least 10 (ten) new outlets for the franchise system within 12 (twelve) months of the date of this agreement.
Master franchise agreements cover two kinds of franchisee fees paid by master franchisees to franchisors. The first is the initial fee for the rights allowed. The second is an ongoing franchise fee (often also referred to as royalty or continuing fee) for the utilisation of the franchise system and ongoing support service of the franchisor. In many franchise systems, the initial fee is divided into equal tranches and then as per-unit opened. The franchise fee is a charge for proceeding with the utilisation of the rights granted and support given.
For the most part, the master franchisee is obligated to utilise the standard sub-franchise agreement of the franchisor and to guarantee that it complies with the local (mandatory) laws. Another way would be that the master franchisee may retain the right to draft a standard sub-franchise agreement given that this standard agreement contains a number of provisions deemed mandatory by the franchisor.
Advertising is indispensable when it comes to ensuring the success of a franchise system. The master franchise agreement typically comprises the provision on how to structure the advertising by specific standards on respective responsibilities/obligations, control, and financing of advertising. Typically, the master franchisee and the sub-franchisee must add to a local advertising fund set up by the master franchisee, just as regional and global advertising funds set up by the franchisor.
To secure the franchisor’s Intellectual Property Rights and maintaining the identity and reputation of the franchise system, the master franchisee will build up and keep an advertising and promotion fund for the development of the Service within the designated Territory by imposing an advertising levy upon all the franchisees of 2.5% of their aggregate turnover, payable in the same manner as the franchising fee.
Master franchising agreement will naturally terminate at the expiry of the agreed terms, unless the conditions of renewal if agreed upon, have been met. Termination for either party is to be provided for in the master franchise agreement. Early termination by the franchisor in the case of a material breach or natural termination in the event of bankruptcy, insolvency, and so forth of the master franchisee are typically included through local bankruptcy and may decide the effectiveness of termination.
The franchisor reserves the right to terminate the agreement without prejudice to any other remedies present under this agreement if the master franchisee shall:
The franchisor reserves the right to terminate the agreement in the case of any other default neglect or failure (which is capable of remedy) affecting the nature of the services given to the customers.
Typically, the law of the country in which the franchisor is domiciled is pertinent as the choice of law to the master franchising agreement. Careful consideration must be given to the number of relevant factors in order to arrive at a well-motivated and useful choice. In the event of disputes under an international master franchise agreement, international dispute resolution will be the most favored solution. Arbitration is by and large, less tedious and time-consuming, and less exorbitant than litigation. It has an adaptable and neutral forum and permits the parties to choose an arbitrator with pertinent subject-matter expertise.
It is imperative to be adaptable and accommodating while drafting clauses that are specific to the parties and surrounding circumstances at that time. Critical and equal attention must be given to ever-connected legal issues pertaining to contracts, IPR, tax, labor law, weights and measures, e-commerce, territoriality, corporate and securities, customs, foreign exchange, banking and finance, the priorities and prerequisites differ in the event that you are drafting from a perspective of the franchisor or a master franchisee and hence, the draft must be made and proofread as well as negotiated by the attorney.
Students of LawSikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:
Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.