Experienced franchisees are often interested in a type of franchise model known as the Master Franchise. In a master franchise, the franchisor sells the franchisee the right to offer and sell franchises to other franchisees generally within a delineated geographic area. This arrangement can be very lucrative, but also can carry significant risks. Lusthaus Law has the necessary experience to help franchisees protect their rights, navigate the legal compliance issues, and negotiate the agreements needed to implement a successful master franchise.
Franchisor-Master Franchisee Relationship
In a Master Franchise, the franchisor becomes a “master franchisor” and the franchisee assumes the role of a “master franchisee” (or “subfranchisor”). The master franchisee does not own the franchise system but acts as a middleman in developing additional franchises. This includes taking responsibility for recruiting and contracting with subfranchisees as well as providing training and ongoing support to them.
Franchise Disclosure Document
Unlike with other franchise models, in a master franchise relationship, the franchisor and subfranchisor are both responsible for compliance with the FTC Rule which requires the parties to prepare, file and update their Franchise Disclosure Document (FDD) annually. Both parties must ensure that prospective subfranchisees receive appropriate and accurate disclosure in an FDD and are jointly and severally liable for any violations by the other party. However, some of the risks for franchisees can be mitigated in negotiating the master franchise agreements, which is why consulting an attorney is essential.
Master Franchise Agreements
There are two franchise agreements used in the context of a master franchise – one between the master franchisor (or “franchisor”) and master franchisee and one between the master franchisee and each unit franchisee. Both agreements raise unique concerns for franchisees. In the franchisor-master franchisee agreement, provisions related to territory exclusivity, sales and opening schedules, royalties and fees, default and termination, and indemnification should be carefully negotiated by a franchise attorney experienced in handling such transactions.
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, since they are form agreements provided by the franchisor, they may pose problems for the master franchisee in negotiations with subfranchisees. An attorney should be consulted regarding potential areas of concern.
Master franchises offer many benefits to a franchisee looking to build a business quickly and effectively. However, the additional compliance and liability issues necessitate bringing in an attorney early in the process. Lusthaus Law has extensive experience advising master franchisees regarding their legal responsibilities and drafting, reviewing, and negotiating franchise agreements to help maximize the benefits of a master franchise.
If you are considering acquiring a master franchise, Lusthaus Law can help. Contact us for a consultation.
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