Every sale of a franchise requires a franchise agreement which sets forth the terms that will govern the relationship between the franchisor and franchisee. In the context of a master franchise, there are two franchise agreements – one between the master franchisor (or “franchisor”) and master franchisee and one between the master franchisee and each unit franchisee.
Franchisor-Master Franchisee Agreement
As with any franchise agreement, the master franchise agreement will contain various provisions related to the parties’ rights and obligations, territory, default, termination and other terms. However, there are some unique issues that arise in connection with the rights granted to the master franchisee. The following contract provisions are some of the ones that should be given extra care in drafting and negotiating:
- Territory. The master franchise agreement generally specifies the territory in which the master franchisee may sell franchises. However, a question that often arises is whether the master franchisee has exclusivity to sell franchises within the designated territory or whether the franchisor will also retain a right to sell franchises within that territory.
- Sales and opening schedule. The parties must agree on the number of unit franchises to be sold by the master franchisee, constructed and opened over a specified period of time. The parties will need to discuss a realistic schedule.
- Royalties and fees. Both the franchisor and the master franchisee typically receive a portion of the initial franchise fee and the continuing fees paid by each franchisee. Who gets to determine what fees will be charged to franchisees and how those fees are split should be given careful consideration.
- Default and termination. In the event the master franchisee fails to meet its performance schedule, the agreement may provide the franchisor with various options for handling the default. For example, the franchisor may have the right to suspend the payment of fees to the master franchisee during any period of default. Alternatively (or in addition), the franchisor may be able to suspend or even terminate the master franchisee’s rights to sell franchises yet continue to permit the master franchisee to service existing franchisees. And, of course, the franchisor may have the right to terminate the agreement altogether. The default provisions should be carefully considered by both parties and should be discussed with a knowledgeable attorney.
- Indemnification. Depending on the jurisdiction, both the franchisor and the master franchisee may be liable to a franchisee who has not been timely provided an accurate Franchise Disclosure Document (“FDD”). Both parties should understand the impact of this joint liability and make an informed decision as to how that risk will be appointed.
Master Franchisee-Franchisee Agreement
The franchise agreement between a master franchisee and unit franchisee generally has the same provisions as any other franchise agreement with a few exceptions. However, it is important to note that the franchise agreement is likely to be the form agreement that the franchisor provided to the master franchisee for use in selling franchises. This may make it even more difficult for a franchisee to negotiate than a typical single-unit franchise agreement.
These issues are only a sampling of the concerns raised by a master franchise. It is important to talk with an experienced franchise attorney about the best way to protect your rights and understand your responsibilities under the agreement. Lusthaus Law has extensive experience drafting, reviewing and negotiating franchise agreements and addressing the needs of franchisors, master franchisees and unit franchisees. If you are considering expanding your brand using a master franchise model or are considering acquiring a master franchise, contact us for a consultation.