HOW TO DRAFT A MASTER FRANCHISE AGREEMENT

Introduction:

A master franchise agreement is a type of franchising agreement in which the franchisor (the proprietor of the brand) transfers the control of the franchising rights in a particular territory to an individual or entity, which is known as the master franchisor. Here, the franchisor grants the master franchisee, the right to own and work and the right to sub-franchise the right to open units to other independent businesses (called franchisees) during a specified time and within a particular area. 

Participants of a master franchise agreement:

A Master franchise agreement comprises of three participants:

1. The franchisor who owns the brand,
2. The know-how or the franchise handbook and the products,
3. The master franchisee.

Advantages of a Master Franchise Agreement:

One of the good things about this agreement is that it is advantageous to both the parties. Some reasons are:

1. The franchisor benefits with quick implantation of the cash from the sale of the master franchisee, and how has someone in the region who has an intimate and considerable comprehension of the economic businesses, demographic, and cultural landscape within that country or cities.
2. The master franchisee is benefited with the name of the brand, goodwill, franchisor support, and commonly partakes in the ongoing royalties and franchise fees from locations in the designated area.
3. This sort of franchising agreement is very appropriate for international development.   However it is to note that the franchisor loses a considerable amount of power   and control and authorization over the system especially because the exchange process might be more difficult in this kind of an agreement.

Main clauses of the Master Franchise Agreement:

• The Preamble

The Preamble part provides information about the key components of the agreement, distinctly clarifying the intention of the parties getting into the agreement. The Preamble tends to give the contextual clarity of the entire agreement which is to be interpreted. It also provides reference in case any dispute arises. The following components are usually incorporated in the preamble:

• A description of the parties;
• A description  of the franchise system and its brief history;
• The ownership of the franchise system
• Consequences of future amendments or changes
• Documents transferred from the franchisor to the master franchisee as a part of the agreement; and
• The common goals of the parties.

• Rights granted under the agreement

The general and mutual objective of the agreement is to develop the franchise system in specified territory and to make this conceivable by franchisor conceding the master franchisee the right to utilize the franchise system, a trademark license, 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.

• Territory

The geographical area that is assigned to the master franchisee should be specified clearly. This territory can be expanded or reduced depending upon the will of the parties, on the condition of attainment of clearly set targets, either in terms of turnover or the number of sub-franchise units opened or a combination.

• Exclusivity

In return for the investment that the master franchisee is making for the advancement of the franchise business in the specified territory, they are granted exclusivity for that specified territory. In general, this means that the master franchisee has the right to franchise the business in the specified territory to exclude any outsider including the Franchisor itself in case there is no limit made with respect to the exclusivity.

• Fees

Master franchise agreements includes two types of franchisee fees paid by franchisees to franchisors:

• The first is the initial fee for the rights allowed.
• The second is an ongoing franchise fee (commonly referred to as royalty) for the utilization of the franchise system and ongoing support service of the franchisor.

In many franchise systems, the initial fee is firstly divided into equal parts and then as per-unit opened. The franchise fee is a charge for proceeding with the utilization of the rights granted.

• Agreement with sub-franchisee

For the major part, the master franchisee is obligated to utilize 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, contingent to the fact that this standard agreement contains a number of provisions deemed mandatory by the franchisor.

• Advertising

Advertising is extremely essential when it comes to ensuring the success of a franchise system. The master franchise agreement generally comprises the provision on how to structure the advertisement strategy by specifying standards on certain responsibilities/obligations, control, and financing of advertising. Typically, the master franchisee sets up a local fund and the sub-franchisee must add to it, similar to the regional and global advertising funds set up by the franchisor.

• Termination

A Master franchising agreement automatically terminates 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 breach or natural termination on the happening of events like bankruptcy, insolvency, etc of the master franchisee are generally included through local bankruptcy and may decide the effectiveness of termination process.

• Applicable laws and conditions of dispute resolution

Generally, the domiciled country of the franchisor is the one whose law is applicable to the master franchising agreement. However, careful consideration must be given to the number of relevant factors in order to arrive at a well-analyzed and useful choice. In the event of disputes under an international master franchise agreement, international dispute resolution is the ideal and most favored solution. Arbitration is in general, less tedious and time-consuming as compared to litigation. It has an adaptable and neutral forum and permits the parties to choose an arbitrator with relevant subject-matter expertise.

Conclusion:

In case of the right brand and right parties to it, master franchising can be a mutually gainful opportunity.

REFERENCES:

1. https://blog.ipleaders.in/drafting-a-master-franchise-agreement/
2. https://www.globalnegotiator.com/blog_en/master-franchise-agreement/
3. https://www.globalnegotiator.com/blog_en/master-franchise-agreement/

BY AAYUSHI CHOPRA