Master franchise agreement
Franchising from one country to another is called “master franchise”.
To penetrate foreign markets, the international franchisor may also choose to rely on a local partner who is completely autonomous. This partner can be described as a master franchisee (master franchisee or sub-franchisor) and serve as a relay to the franchisor. A charge may be incurred by the master franchisee to hold the franchise network under the rules of the market in his country.
The master franchise contract is concluded directly with a master franchisee (sub-franchisor) to conclude agreements for a sub-franchise with franchisees (sub-franchisee) in the foreign country. In the foreign country, the master franchisee will behave as a franchisor, and to this end it will use the franchise system of its franchisor's trademarks, brands, and patents, which will be operated by sub-franchisees.
There are three parties and at least two contractual relations in the master franchise:
• Firstly, a relationship between the franchisor and master franchisee,
• Secondly, a relationship between the master franchisee and sub-franchisees.
In cases of direct franchising discussed in paragraph 1, they will involve a heavy investment, although they do have the opportunity to later receive a broader control of the concept, the trademark and know-how.
Franchising applies directly especially in countries bordering France and Francophone countries (Belgium, Switzerland etc.). More the country is geographically and culturally distant more the master franchise is needed.
The advantages and disadvantages
The advantages of a master franchise are mainly financial. The master franchisee minimizes the franchisor's investment in the implementation of the franchise in the country in question. The master franchisee supports a number of expenses. For example, the first pilot outlet and adaptation of the concept in the local market (if necessary), translation of the Bible, etc ... Although there is no lack of investment, financial risk of the franchisor is considerably reduced in the case of master franchising. The financial failure of the master franchisee will not, in principle, have serious direct financial consequences for the franchisor (except trial).
Another advantage is on the human aspect and the need for adaptation of the franchise to the specifics of the foreign country. The franchisor should rely upon people who know their environment and can therefore reduce its investment in people and risks. The aforementioned people have a better knowledge of the territory and what it takes to adapt the concept.
The main disadvantage of the master franchise lies in the risk of loss of the franchisor's control over the master franchisee and therefore on the sub franchisees. In addition, any failure of the master franchisee would be detrimental to the local network and require the franchisor, unless he want to risk losing his network in the country concerned, to deal directly with franchisees on the premises. But often they will have neither the means nor the ability to do so.
It must therefore be included in the master franchise contract and not make mistakes in the calculation of royalties. The master franchise is the most common method to implement a franchise on a foreign territory.
If the franchisor does not have human and financial resources to invest directly in a foreign country, it can rely on a master franchisee.
