Franchises have always been a great way to expand business, especially in hard-to-reach geographical locations. Expanding globally allows the franchisor to reach multiple locations without a physical presence while the franchisee enjoys the goodwill and brand recognition of the already established franchise.
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Types of Franchise
While establishing a master franchisee is an amazing opportunity for both the franchisor and franchisee, setting up a franchise business entails several factors to be considered. The parties have much to decide upon, from locations to loyalties, capital investment, procedures, and quality expectations.
However, the most important decision is to decide upon the type of franchise. Unlike the popular belief, all franchises are not the same. Franchises are used for different purposes and business models and, therefore, have various types to suit the needs of the businesses. Here are a few commonly engaged in types of franchises:
Single-Unit Franchise
The franchisee operates one outlet under the franchisor’s brand. It is the simplest and most common entry-level franchise model, suitable for individuals starting franchising.
Multi-Unit Franchise
The franchisee operates multiple outlets within a defined region. This arrangement is ideal for experienced franchisees seeking to grow their business footprint across several locations.
Area Development Franchise
A franchisee agrees to develop and operate several outlets in a specific area within a certain timeframe. It involves higher capital investment and requires advanced management capabilities.
Master Franchisee
A master franchisee obtains the rights to develop a franchisor’s brand in a specific region or country. They can operate outlets directly and recruit sub-franchisees as regional franchisors. This model suits experienced entrepreneurs who want significant control and growth opportunities.
Sub-Franchise
A franchisee under a master franchisee. Sub-franchisees manage individual outlets or businesses, while the master franchisee provides training, support, and operational oversight.
Joint Venture Franchise
A partnership between the franchisor and a franchisee to operate the franchise. This is commonly used when entering new markets where local expertise is needed.
Conversion Franchise
Independent businesses are transformed into franchise outlets, adopting the franchisor’s branding, systems, and marketing strategies. This is common in service industries like real estate or plumbing.
License Agreement Franchise
This model grants the franchisee rights to use the franchisor’s intellectual property, such as trademarks or processes, often with minimal operational guidance.
Master Franchisees and Their Potential Drawbacks
Though all franchises have been popular, master franchises have gained considerable traction, especially given the rise in the global economy and the Internet era. But despite its allure, even an amazing business model like Master Franchisee still has drawbacks.
Master franchises, due to their complex nature, often encounter legal battles stemming from the following features:
Territorial Disputes
The exclusivity granted to a master franchisee for a specific region can lead to conflicts if the franchisor or other franchisees operate or expand within that territory, violating exclusivity agreements.
Control and Oversight Issues
Master franchisees act as mini-franchisors, recruiting and managing sub-franchisees. Disputes arise over the franchisor’s control versus the master franchisee’s autonomy, especially regarding operational decisions.
Performance and Development Obligations
Master franchise agreements often require franchisees to meet development targets (e.g., opening a certain number of outlets). Failure to meet these targets can lead to termination disputes or claims of unfair terms.
Royalty and Fee Structures
Legal battles can occur over disputes in fee-sharing arrangements, such as royalties, advertising contributions, or initial franchise fees, particularly if either party feels terms were unclear or unfairly applied.
Termination and Renewal Clauses
Termination due to perceived non-compliance or underperformance and disagreements over renewal terms or rights after the contract ends often result in legal challenges.
Intellectual Property (IP) Rights
Issues arise if the master franchisee uses the franchisor’s branding, trademarks, or trade secrets beyond the agreed terms or if the franchisor claims the master franchisee is misusing IP rights.
Recruitment of Sub-Franchisees
Conflicts may emerge over the approval, support, or management of sub-franchisees, especially if the franchisor believes the master franchisee is damaging the brand’s reputation.
Cross-Border Legal Complexities
International master franchises face challenges due to differing laws on trade, employment, and taxation in the franchised region, which can lead to jurisdictional disputes.
Master franchise agreements require precise drafting and clear terms to minimize these potential legal disputes.
How To Fight Uphill Battle Of Owning A Master Franchisee Business
In most cases, running a master franchise business feels like a simple procedure with an easy-to-follow guidebook to help you out. However, as discussed earlier, the business is not free of difficulties. While it is crucial to recognize possible issues, it is even more important to understand how you can solve those problems or, even better, avoid them even before they arise.
One surefire way to keep trouble at bay is to have an extensive and explicit franchise agreement stating all terms and conditions that bind both parties. The agreement should also discuss possible issues and amicable ways to resolve them. An excellent franchise lawyer will be able to draft a fair and acceptable agreement to both parties.
However, in certain situations, more than that might be needed. Therefore, the parties should have a lawyer on board for the initial agreement and the long run. A good lawyer, especially the one associated with the franchise from the get-go, understands the business, the parties, and their needs. Armed with such crucial information, a good lawyer can easily power through any difficult situation.
