There are three types of agreements used when
a franchisor desires to expand through multi-unit as opposed to single unit
development: Master Franchise Agreement, Area Representative Agreement and Area
Developer Agreement. Before exploring some of the basic elements of each
arrangement, it is important to note that there may be franchise registration requirements
associated with entering into any of these agreements and it is important to
speak with a qualified attorney who can help you understand the impact of each
type of arrangement.
Master
Franchise
This type of multi-unit development is most
often seen with international expansion. In this type of arrangement, the
franchisor will delegate nearly all pre-sale and post-sale obligations to the
master franchisee who essentially acts as a sub-franchisor. However, while most
of the franchisor’s obligations are delegated, most franchisors will retain the
right to ultimately approve or reject sub-franchisee candidates and specify the
format for the FDD and the Franchise Agreement. The reason for this is that in
the event the Master Franchise Agreement is terminated, a franchisor needs to
agree with the obligations and requirements imposed on both the sub-franchisee
and the franchisor.
If you are a franchisor seeking to expand
through a Master Franchise Agreement, or a franchisee looking to purchase a
Master Franchise Agreement, there are some key provisions that need to be
addressed in the agreement. Among the provisions to be aware of:
·
Is
the master franchisee required to sign the sub-franchise agreements;
·
Is
there a strict development schedule;
·
Is
the master franchisee allowed to develop his/her own franchise units;
·
How
are the currency issues handled;
·
How
are taxation matters handled;
·
Is
there a translation requirement;
·
What
is the term;
·
Are
there country-specific franchise laws that must be followed;
·
At
the expiration of the term of the Master Franchise Agreement, what happens to the
then-current sub-franchisees, their territories and their agreements;
·
What
is the royalty and other fee splitting arrangement (if any); and
·
What
is the territory and is it exclusive.
Area
Representative
In this type of arrangement, the franchisor
typically delegates only certain pre-sale and post-sale obligations. The
typical area representative relationship is one where the area rep helps to
advertise and promote the franchise opportunity in a specific market, engages
potential franchise candidates and helps provide operational support and
guidance to the any franchisee resulting from the area rep’s efforts.
Key provisions to be aware of in this type of
arrangement include:
·
What
is the territory and is it exclusive;
·
What
specific post-sale obligations and services are to be performed by the area rep
on the franchisor’s behalf;
·
If
there are current franchisees in the territory, will the area rep perform the
services and obligations to them or only to new franchisees;
·
What
is the term;
·
What
is the compensation/fee arrangement; and
·
Does
the franchisor have the right to open and operate company-owned units in the
territory without compensation to the area rep.
Area
Developer
This type of multi unit development arrangement
is most closely aligned with single unit franchising and is a common form of
development. Here, the third-party developer agrees and commits to develop and
operate a specified number of units in a designated territory. This arrangement
is most commonly used in a domestic market where there is a low or non-existent
franchisor presence.
Key provisions to be aware of in this type of
arrangement include:
·
What
is the term and time frame for developing the units;
·
What
is the territory and is it exclusive;
·
Are
additional franchise units outside the development schedule allowed;
·
What
is the price per franchise unit developed; and
·
What
happens to existing franchise units of the area developer if the Area
Development Agreement is terminated.
With each type of multi-unit arrangement
there are several additional factors to consider. It is important to have a
clear idea of why you are seeking either to expand through multi-unit
development or to purchase a multi-unit development agreement, and to discuss
these ideas and plans with qualified professionals.