This article is written by Saharsh Prateek, pursuing a Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho.com.
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.
Components of a master franchise agreement
Master franchise agreement comprises three participants:
- The franchisor who owns the marks,
- The know-how (franchise handbook) and the products,
- The master franchisee.
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:
- Exploit and utilize Intellectual Property Rights including without limitation, the trademarks, manuals, and expertise (know-how) to create, set up, and work franchise unit in a designated territory; and
- Grant sub-franchisees and sub-licence to the trademarks and the franchise system to operate franchise units in such designated territory. Also, the franchisor furnishes the technical assistance in association with the franchised business to the master franchisee, which in turn, furthers such technical assistance to its sub-franchisees. It is usually exclusive, but can also be non-exclusive.
Why master franchise?
Master franchising is advantages to both parties here, is the reason:
- 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.
- The master franchisee benefits with the strength of the brand, franchisor support, and will commonly partake in the ongoing royalties and franchise fees from locations in the designated area.
- This sort of franchising agreement is appropriate for international development. However, the franchisor loses a considerable piece of power and control over the system because of the exchange of responsibility and the authorisation of system standards might be more difficult in this kind of relationship. Appropriately, determination of the master franchisee is a critical endeavor to the success of the relationship.
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:
- A description of the parties and their autonomy from one another;
- A description of the franchise system and its history;
- The ownership of the franchise system and the consequences of future framework amendments for changes regardless of the origin of such changes;
- Documentation transmitted from the franchisor to the master franchisee before the conclusion of the agreement; and
- The common goals of the parties.
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”)
- Franchisor as a result of extensive research, time-investment, expertise, and money has created and owns an extraordinary and distinctive system particular to the establishment and operation of [description of franchise business], using the unique operating system and tools developed and maintained by Franchisor to [description] and using the proprietary interface program designed by Franchisor and made accessible to its Franchisees to aid in the management of the Franchise business (hereinafter referred to as the “system”);
- The distinctive attribute of the system include without limitation a distinctive design and format, and training management and promotional framework, in relation to the establishment and running operation of [franchise business] Centers, all of which may be changed, groomed, and further developed by the Franchisor time to time;
- Franchisor recognizes the System, in the Province(s) of [Provinces](“Territory”), through certain trademarks, trade names, logos, and indicia of origin, including the mark [TRADEMARK] and such other trade names and Trademarks, are designated now or may hereafter be designated by Franchisor in writing, for use in connection with the System (“Proprietary Marks”);
- Master Franchisee wishes to acquire the right and license to utilize the Proprietary Marks and the exclusive right to grant Franchises to other individuals or entities (“Franchisees”) to establish and run Franchise Business Centers using the Proprietary Marks and System (“Franchisor Centers”) in the Territory, and wishes to get the training and assistance provided by Franchisor in connection therewith; and
- Master Franchisee understands and recognizes the importance of Franchisor’s high standards of quality, appearance, and service and the necessity of operating the Franchisor Centers in congruence with Franchisor’s standards.
2. Rights granted
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.
- Subject to and as per the terms hereof the Franchisor grants to the Master Franchisee:-
- The exclusive right to continue the Business within the Territory.
- The right to use in the Business the Marks and symbols owned and utilised by the Franchisor together with the benefit of the collected experience and knowledge relating to the clauses of the Services.
- The Master Franchisee will not hold itself out just like the assignee or the partner of the Franchisor and shall distinguish itself as an independent undertaking in all proceedings with third parties and on all stationery, signs, and other items carrying the Marks.
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.
- Master Franchisee undertakes that there shall be open and operational no less than the minimum cumulative number of Franchisor Centers described in the “Minimum Cumulative Number of Franchisor Centers Open and Operational” in the Exhibit A hereto; given however the Master Franchisee shall have at least 1 (one) Master Franchisee owned Center in operation for minimum 3 (three) months before entering into a Franchise Agreement with and Franchisee, except in any case endorsed by Franchisor.
- Each Franchisor Center, inclusive of any Franchisor Center established and operated by the Master Franchisee shall be established in accordance with the unit franchise agreement (“Franchise Agreement”) prepared by Franchisor.
- Master Franchisee shall produce to the Franchisor the date of opening of each Franchisor Center at least 20 (twenty) days prior to the opening.
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.
5. Development schedule
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.
- The master franchisee shall pay the franchisor in Canadian Dollar the amount of $12,000 net of tax by way of starting fee payable as to:-
- $7,000 on the completion of the Agreement;
- $2,500 four months past the date of the execution of the agreement;
- $2,500 eight months past the date of the execution of the agreement.
- The master franchisee will pay the franchisor the franchise fee at the rate of 12% of the total value (barring value-added tax) of all invoices delivered by the franchisees during each accounting period. The master franchisee will also pay any value-added tax appropriately chargeable by the franchisor on the said franchise fee.
- The accounting periods will be the duration of one English calendar month.
- In case of any default in the installment of any sum which may be due to the franchisor by the master franchisee, the master franchisee will pay to the Franchisor interest at the rate of 3% per month, on the amount of any sum due however not paid.
7. Agreement with sub-franchisee
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.
- Master franchisee comprehends and acknowledges that each and every detail of the system and the franchisor centers are crucial to master franchisee, franchisor, franchisees, and other system master franchisees and franchisees to:
- Develop and keep up the quality operating standards;
- Increase the demand for the products and service;
- Protect the franchisor’s reputation and goodwill.
- Master franchisee shall attend and acquire the initial training program offered by the franchisor in [city/province].
- Master franchisee shall employ a trainer fluent in the English language who shall complete the franchisor’s training program. Such trainer shall provide training to master franchisee and franchisee’s employees at a reasonable location as master franchisee shall approve.
- Master franchisee shall cause each franchisor to utilise and possess the premises of the franchisor center solely for the operation of the business franchised hereunder.
- Master franchisee shall cause each franchisee to operate their respective franchisor center in strict conformity with such methods, standards, and specifications as may be prescribed and updated from time to time, in the manual or otherwise in writing.
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:
- Fail to begin the business in the period of 4(four) months from the date of the agreement.
- Neglect or fail to perform any commitments or conditions undertaken by the master franchisee.
- Has produced information that comprises any material fact which may turn any statement misleading, in its franchise application.
- Not make the payment of any sum required under the terms of this agreement latest within 15(fifteen) days following its due date.
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.
10. Applicable law and dispute resolution
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.
- Standard clause
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.
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