FRANCHISE: International master franchise agreement

Thursday March 26 2020



Wambugu Wa Gichohi

Wambugu Wa Gichohi 

By Wambugu Wa Gichohi

While franchise agreements are generally the same, the master franchise agreement slightly differs from the normal franchise agreement signed with franchisees at home. In different articles, we have discussed the contents of a normal franchise agreement. The next few articles discuss the contents of a master franchise agreement signed for international markets.

Second is the term of the agreement and the terms of renewal. As discussed elsewhere, franchise rights are granted to be used for a period, they are never sold. The international master franchise agreement will, just like the domestic one, specify the period of the grant. Grant periods differ depending on the franchise model and the sector involved. Additionally, the grant period mainly depends on the investment levels required and the period the master franchisee and their sub-franchisees would take to recoup their investment and make some descent profits. The difference with local franchising is that since the master franchisee is allowed to sub-franchise, the period granted must essentially be long enough for all partied to make a decent return of their investments.

The term of a master franchise is likely to be ten to twenty years, often with renewals, subject to achievement of both annual and cumulative targets. There will be provisions for termination or loss of exclusivity if the minimum performance is not reached. Alternatively there may be provisions for the master franchisee to make payments to the franchisor of the same amounts as would have been payable to the franchisor if the minimum performance targets had been met instead of termination or loss of exclusivity.

Whether the sub-franchise period can be longer than that of the master franchise with the international franchisor is a matter of agreement with the franchisor, and should be clearly indicated on the agreement. Remember, the franchisor’s brand comes first and whether the current master franchisee is the same one or a different one in future, the brand should not be adversely affected. Should a master franchise be terminated midstream, the international franchisor has the responsibility to protect the brand by either taking over the territory and running it as they jointly seek a suitable master franchisee with the terminated party or appointing one of the sub-franchisees to take over the master franchise either permanently or on a temporarily as they seek a permanent solution. This has to be agreed at the beginning, and if a re-purchase option by the franchisor is agreed on, the financials have to be agreed upon from the onset.

The conditions of renewal of a master franchise need to be stated outright, just as in domestic franchising. These include, but are not limited to the agreed targets (both in turnover terms and the number of outlets), whether there is and the amount of fees charged upon renewal, any renovations and upgrades required for all outlets in the master franchisee’s network-includes the sub-franchisees- and generally any other issue that might be of interest to determine renewal. The key to success in franchising is consistency, hence most international franchisors, just like in domestic franchising, are keen to renew their franchisees as long as the brand is growing.

According to the International Franchise Association (IFA), overly stringent renewal conditions or extremely broad grounds for termination such as excessive renewal fees, burdensome forms to be filled out for release, or the franchisor retaining the ability to deny renewal for trifle matters or a small breach of the agreement should be a red flag. This may indicate that the international franchisor is more interested in selling and reselling franchises than in assuring the success of existing franchisees or in assuring a long-term relationship.

Advertisement

Further, any provision for termination upon death of the main master franchisee without the right to transfer the franchise to an heir or a surviving spouse indicates that the international franchisor may not be interested in orderly transfer of property rights or in continuation of a family member in an essentially family-owned and operated business.

The writer is a Franchise Consultant helping indigenous East African brands to franchise, multinational franchise brands to settle in East Africa and governments to create a franchise-friendly business environment

Advertisement