Master franchising is a great way to expand your business into new territories. To carry out master franchising successfully though, you'll need a well written master franchise agreement.
Why Expand Through Master Franchising?
Master franchising is one of the most popular and successful ways to expand a franchise system:
- Around 3200 out of 7500 worldwide franchises offer master franchise opportunities
- More than 80% of US franchises expand overseas through master franchising
- 30% of master franchisors end up wanting to buy another franchise
The benefits to both parties speak for themselves. But the relationship needs to be well defined to begin with in order to protect each party...
Your master franchise agreement is an important legal document. It will cover a variety of areas critical to the success of your franchise in the new territory, and which should also serve to protect the franchise network and system you've already built up.
So how do you go about writing an airtight master franchise agreement?
Here we provide a template checklist to guide you.
About This Master Franchise Agreement Template
This Master Franchise Agreement Template should give you a clear idea of the sorts of clauses and statements which are found in most standard master franchise agreements.
That said, this template deliberately avoids the use of language that is legally binding, and so cannot be used as a copy and paste blank template. This is because while Local Fame has a deep knowledge and understanding of master franchising, franchising, and franchise systems in general, creating a vital legal document such as this should always be done in concert with legal experts (see below).
A Note on Legal Advice
Without fail, always get legal advice when writing a master franchise agreement. They are documents which may need to withstand dispute and disagreement between the parties involved. Thus, they should always be written in language that is "clear, correct, concise, and complete" - that is to say, correct legal English.
Master Franchising Agreement Template
This opening statement defines the parties involved, and gives a basic legal framework for their relationship with each other.
This section designates the parties between which the agreement will take place (Franchisor and Master Franchisee).
It should include:
I. Organisation names
II. Official business registration numbers
III. Names of representatives of each organisation
IV. Professional business addresses of organisations
V. Date the contract comes into force
This section goes into further detail about the parties involved in the agreement.
It should include:
I. Brief description of the scope of the Franchisor's business
II. A description of the "new territory" which the Master Franchisee will control expansion into and the development of sub-franchisees within
III. An acknowledgement by the Master Franchisee that the Franchisor has developed unique systems, processes, facility designs, branding, and knowledge (often described as "know-how") - and usually all contained within the Franchise Manual - and that this belongs to the Franchisor
IV. An acknowledgement by the Master Franchisee that the Franchisor's know-how is secret - not general knowledge. A statement is usually made to the effect that the Master Franchisee is aware of enough of this information, and believes it to be substantial enough to warrant the franchise fee because of the benefits it will lead to as regards the Master Franchisee's business
V. A statement regarding Intellectual Property rights on behalf of the Franchisor
VI. An acknowledgement by the Master Franchisee that the Franchisor has acquired knowledge, skill, and systems specific to the effective running of the specific type of business. Brief descriptions of some systems are usually given - and the fact that the Franchisor owns them is again stated, as is the fact that they are the subject of this agreement
VII. A statement that the Franchisor now wishes to expand the scope mentioned in (i) to include a new territory
VIII. A statement that the Franchisor still owns the registered and unregistered trademarks in the territory which is to be expanded into, as well as all other identifying characteristics of the business
IX. A statement that the Master Franchisee wants to make use of the "know-how", trademarks, and other systems described in this agreement to build and develop a network of franchises in the new territory
X. An acknowledgement by the Master Franchisee that the Franchisor's "know-how" is going to give the Master Franchisee a competitive edge when establishing the network in the new territory
XI. A statement of commitment on behalf of the Master Franchisee that it will do everything possible to expand and make a success of the business, using the tools (systems, "know-how" etc.) that the Franchisor agrees to supply
XII. An acknowledgement from both parties that satisfactory financial surveys of the new territory have been carried out, usually including a statement on behalf of the Master Franchisee to the effect that they acknowledge that making a success of the franchise in the new territory will be largely down to their abilities and efforts
XIII. A final acknowledgement that the Master Franchisee has received legal advice and usually financial advice before signing the Agreement
Granting of Rights
This section states that the Franchisor is going to grant the Master Franchisee certain rights relating to:
I. Carrying out business using the "know-how" and systems owned by the Franchisor within the new territory
II. The ability to use Trademarks and other identifying characteristics of the business within the new territory
III. Differentiating the Master Franchisee as a separate business entity which is not able to conduct business on behalf of the Franchisor, and which must differentiate itself when doing business with third parties
This section lays out the exact dates for the commencement and termination of the Master Franchise Agreement.
It will also sometimes include details relating to the conditions necessary for renewing the agreement.
Setting of Franchisor's Obligations
This section lays out the Franchisor's obligations to the Master Franchisee.
a) Franchisor's Initial Obligations
The Franchisor's initial obligations are usually stated to be:
I. To offer advice and information to assist the Master Franchisee in establishing their business - in particular the first franchise location in the new territory
II. A set period of operational support to assist the Master Franchisee in the establishment of the first franchise locations, including sometimes providing trained staff or loaned equipment
b) Franchisor's Continuing Obligations
The Franchisor's continuing obligations are usually stated to be:
I. To continually notify the Master Franchisee of any updates or improvements to the system or "know-how" - this is usually stated to be in the form of edits to the Franchise Manual
II. Assistance with the creation of or provision for advertising materials or marketing materials to be used in the new territory
III. Extra assistance with management, finances, or marketing if requested by the Master Franchisee, and if considered reasonable
IV. Details of any franchise training schedules which have been implemented, usually expanded upon in the Training section of the Agreement. It is usually specified that attendance at training events be both highly recommended and free
V. A statement to the effect that the Franchisor will not sell any services or provide "know-how" to any third parties within the new territory, or grant rights to use the franchise system to third parties within the new territory
VI. Usually a statement to the effect that the Franchisor will not market the franchise system within the new territory unless agreed with the Master Franchisee
Setting of Master Franchisee's Obligations
This section lays out the Master Franchisee's obligations to the Franchisor.
They are usually stated to be:
I. A statement to the effect that reasonable financial planning has been undertaken, and that the Master Franchisee has the financial ability to uphold the Master Franchise Agreement
II. The Master Franchisee will register this Agreement as required by any legal entities or laws in effect in the new territory. And that they will do so within a set period of time, and obtain any permissions required to commence trading
III. The Master Franchisee will commence trading within a set period of time of having obtained the permissions described in (ii)
IV. A statement that the Master Franchisee will follow all law and by- laws they are subject to, including safety laws and regulations
V. A statement that specifies the period and frequency of the monitoring that the Master Franchisee will conduct on sub- franchisees in the new territory. Plus usually an additional statement that the Master Franchisee will undertake whatever actions required by the Franchisor both to monitor adherence to Franchise Agreements between the Master Franchisee and sub-franchisees in the new territory, and to enforce standards
VI. The Master Franchisee usually states that it will be ready and able to support sub-franchisees within the new territory as they conduct business, and to enable sub-franchisees to continue to conduct business
VII. A statement that the Master Franchisee will use all Trademarks and identifying characteristics of the business in line with guidelines and best practice descriptions
VIII. A statement to the effect that the Master Franchisee will always utilise best practice as regards customer service, and ensure that all sub-franchisees within the new territory conduct their customer service in line with brand standards
IX. To comply with all new systems that the Franchisor might set out for all franchisees and Master Franchisees for the purposes of marketing, promotion, or general improvement of the franchise system
X. To ensure signed confidentiality statements - or similar documents - are signed by all employees hired in the new territory within a set period of each commencement date
XI. A statement that the Master Franchisee will maintain written financial accounts of their business, and keep for them a set period after the financial year is over. There is usually an additional statement which guarantees the Franchisor or their key members of staff access to the Master Franchisee's books whenever reasonable request is made
XII. A commitment from the Master Franchisee that all sub-franchisees in their territory will also maintain financial records, and submit accurate details of these records when requested by the Franchisor
XIII. Provide whatever financial information relating to the carrying out of services is requested by the Franchisor
XIV. Provide details of customer service interaction, including records of phone calls when requested by the Franchisor
XV. A commitment that the Master Franchisee will not acquire shares or capital in a competing business. This is sometimes qualified to the extent that this is permissible so long as the Master Franchisee has no control over the competing business
XVI. A statement from the Master Franchisee that they will not engage in practices which compete with other Master Franchisees of the same franchise system in different territories
XVII.Not to reveal or publish information relating to any aspect of the franchise system, Franchisor, or Franchisor's business to any third parties without the Franchisor's consent
XVIII. A commitment that the Master Franchisee will use only the recommended equipment to provide services, unless it can prove that equipment of a similar standard and function can be acquired elsewhere. In this latter case permission from the Franchisor is usually required before purchase
XIX. That the Master Franchisee will not seek to create or promote alternative "know-how" or follow a different system to that laid out within the Franchise Manual
XX. To transmit all data and information acquired through operating the franchise system in their territory to the Franchisor, to contribute to the overall "know-how" of the franchise network
XXI. Not to bring the reputation, name, or services of the franchise system into disrepute
XXII.Overall, to continue to drive sales and profits from conducting business and providing services
Goals and Objectives
This section specifies the timeframe and numerical targets for the Master Franchisee's expansion within the new territory.
An example of this might be:
"The Master Franchisee will use all best efforts to open at least ten new franchise locations within the new territory within one year."
Penalties for failure - usually an extension period followed by potential termination of the Master Franchise Agreement - are generally specified here. Other penalties sometimes include blocking the Master Franchisee from opening any further franchises.
This section details the training which the Franchisor will provide for the Master Franchisee, and which the Master Franchisee will provide for staff and sub-franchisees within the new territory.
a) Initial Training
The initial training obligations of Franchisor and Master Franchisee are usually stated to be:
I. Usually, the Franchisor will provide training for both the Master Franchisee and the manager of the Master Franchisee's first new franchise location in the new territory at minimum. Other members of staff of the first franchise location may also be included. The duration and location of such training is usually specified
II. This training is often extended to the managers and key members of staff of the first 3-5 new franchisees in the new territory as well
III. There is usually a statement that the Franchisor will cover the costs of this training, but that the Master Franchisee will be responsible for paying their own staff during this time, as well as any travel, accommodation, and incidental costs
b) Continuing Training
The continuing training obligations of Franchisor and Master Franchisee are usually stated to be:
I. A commitment that the Franchisor will continue to offer further training to the Master Franchisee and their key members of staff as and when it is judged appropriate
II. Usually that the Franchisor will provide headquarters-level training for new managers and sub-franchisees in the new territory
III. That the Master Franchisee will ensure that all staff operating within the franchise network in their territory be fully trained to the required standard within a set period of each commencement date
Fees and Invoicing
This section covers all of the fees that will be payable from the Master Franchisee to the Franchisor, as well as exact schedule for their receipt, and methods of invoicing.
a) Fee Obligations
Fee obligations are usually stated to be:
I. The initial fee - usually either a lump sum, or payable over a specified period of time II. Royalty fees - usually a percentage of the value of all invoices rendered by sub-franchisees in the Master Franchisee's territory, less VAT. The Master Franchisee is often stated as being responsible for paying any VAT on the franchise fees III. Accounting periods and payment schedules - are specified IV. Interest on failed payments - this is usually a percentage of the value of the failed payment amount
b) Invoicing Obligations
Invoicing obligations on the part of the Master Franchisee are usually stated to be:
I. To provide a written summary of all sub-franchisee accounting within a certain duration of the end of an accounting period, and to monitor this process to ensure it is completed successfully
II. To have the annual profit and loss statement of each sub-franchisee within their territory examined by a Franchisor-approved independent accounting expert, and then sent to the Franchisor
Marketing and Advertising
This section will detail the contributions that the Master Franchisee is expected to make to the marketing and promotion of the franchise system. Any financial contribution is often in the form of an additional fee payable - like the royalty fee - on a fixed basis. This figure is usually a percentage, and should always be specified. Responsibilities relating to the creation of marketing materials on the parts of the Franchisor and Master Franchisee are also usually specified
Trademarks and Identifying Characteristics of Business
This section relates to the critical safeguarding of the trademarks and other brand insignia of the Franchisor's system.
The obligations here are usually stated to be:
I. Both parties will work together to ensure that the Master Franchisee and all sub-franchisees within the new territory become registered users of the trademarks
II. An acknowledgement by the Master Franchisee that it only holds the rights to use the trademarks for the benefit of the Franchisor, and will only assign the rights it acquires with the permission of the Franchisor
III. Both parties will work together to protect the trademarks and assert the Franchisor's rights over the trademarks
IV. A statement that the Franchisor can set aside the trademarks at will
V. A commitment from the Master Franchisee that it will notify the Franchisor of any infringement of the trademarks or rights to use them observed within their territory. There is sometimes an additional statement relating to the methods used to resolve these circumstances, with the Franchisor usually accepting financial costs for actions which need to be taken
This section provides details of when and how the Master Franchisee will permit the auditing or monitoring of the franchise network within their territory.
Both parties' obligations relating to monitoring are usually stated to be:
I. A set period and number of periods per annum where the Franchisor, or key members of the Franchisor's staff, will visit the Master Franchisee and any sub-franchisees for monitoring purposes
II. Usually a requirement that the Master Franchisee take all reasonable steps to allow the Franchisor or key members of their staff to visit any of the franchise locations within the Master Franchisee's territory for quality checking whenever required
Both parties' obligations relating to auditing are usually stated to be:
I. A statement that the Master Franchisee is expected to make available all materials necessary for auditing the business within their territory to the Franchisor at any time. There is usually a stipulation that the request be made in writing, and that it will happen during standard office hours
II. If there is any deficit in the payments made by the Master Franchisee to the Franchisor, there is usually a statement relating to the amount of time they have to rectify it. The details of any additional penalty payments which are expected are also usually included here
Assignment by Franchisor
This section usually governs the ability of the Franchisor to assign the benefits of this agreement to another party at a time of their choosing. There should be a stipulation that the new party must be willing and able to uphold the Franchisor's part of the agreement. The Franchisor is also usually required to notify the Master Franchisee of this change while leaving a certain reasonable period of time before the change actually comes into effect.
This section covers the laws that will be applicable to the franchise agreement. It tends to follow the standard layout for this type of clause, usually covering areas such as:
- General contract law
- Agency and Distribution contract law
- Intellectual Property law
- Technology transfer laws
- Competition law
- Fair Trade practices law
- Consumer protection and product liability law
- Corporate law
- Property law
- Leasing and security law
- Tax law
- Labour law
- Foreign investment and import law
- Joint venture law
- Industry specific laws and regulations
- Nation and region-specific laws and regulations, usually incorporating those in both the new territory, and the territory in which the Franchisor is based
Dispute Resolution Procedure
This section describes the actions that will be taken in the event of a dispute between the Franchisor and Master Franchisee, usually with the aim of avoiding expensive legal proceedings which are almost always massively detrimental to both parties.
This section governs the circumstances in which the Master Franchise Agreement could or will be terminated.
These are usually stated to be if the Master Franchisee:
I. Fails to start trading within the timeframe specified in the Master Franchisee's Obligations
II. Fails to perform any of the obligations laid out in the Master Franchisee's Obligations
III. Gives the Franchisor materially false or misleading information either deliberately or by omission during the application process
IV. Becomes involved in voluntary or involuntary liquidation, or takes any steps to cease trading
V. Fails to pay any fees required by the Master Franchise Agreement within a specified timeframe
VI. Fail to satisfy the Franchisor that "know-how" or other sensitive information has not been passed to a third party when the Franchisor has reasonable grounds to suspect this is the case
VII. In any way challenges the validity of the Franchisor's trademarks
Consequences of Termination
This section details the obligations of the Master Franchisee if the Master Franchise Agreement is terminated.
These are usually stated to be:
I. To cease all trading as a franchise, unless an agreement is made with the Franchisor
II. To return the Franchise Manual and all materials relating to the "know-how" and operation of the franchise system, as well as all promotional or advertising materials, and to cease displaying materials featuring the franchise's trademarks, or to use the trademarks in any way. There is usually an added stipulation that the Franchisor be permitted access to check that all materials have been removed or returned
III. To ensure no copies of the above materials are kept or retained in any capacity
IV. Not to disclose any sensitive information, or information relating to the franchise's systems or "know-how", to any third party
V. To pay all outstanding fees and penalty fees due, usually without any chance of deduction
VI. To remove themselves as a registered user of the franchise's trademarks
VII. Not to make use of the trademarks, slogans, and other associated characteristics of the franchise in a way which might imply they are connected to the franchise system
VIII. Not to promote themselves as having been a master franchisee of this franchise, or in any way in future claim to be a master franchise of this franchise
IX. Assign the Master Franchise Agreement and all agreements made subsidiary to it to the Franchisor or its nominee, subject to Franchisor approval
X. Not to compete with the franchise system by starting trading, or to be in any way directly or indirectly involved with, a similar type of business in the same territory for a set period of time - usually at least a year
XI. Not to attempt to lure customers or other employees of the franchise system away from the franchise
XII. Not to duplicate or recreate any part of the franchise system There is also usually a very important clause which states that in the event of termination, the Master Franchisee assigns the Franchisor power of attorney so that all the actions within the Termination and Consequences of Termination sections can be completed and enforced.