International expansions of franchise systems have been increasing at a rapid pace for years. For some franchisors, such expansions have proved to be very successful, but for others, the experience has been costly and frustrating. Often, one of the greatest areas of frustration is getting the master franchise agreement settled and signed, even when the candidate and the fundamentals of the deal are right.
This article examines some of the most common issues that arise in the negotiation of an international master franchise agreement and suggests some solutions which might help to get the deal done.
The Territory, Franchise Fee and Performance Criteria
Most international master franchise arrangements provide that the rights are granted, usually on an exclusive basis, for an entire country or group of countries, such as the Middle East.
The prospective master franchisee often wants to lock up the broadest territory possible in the event the franchise expansion proves successful. However, serious problems can arise when the exclusive rights granted are to territories which are far too large for the capabilities of the master franchisee.
Frequently, two sticking points in the negotiations are the amount of the initial franchise fee for the territory and the performance criteria, (usually the number of units required to be open each year) which, if not met by the master franchisee, are grounds for termination.
If the franchisor can forego the larger initial franchise fee for a series of smaller payments based on a per unit opened measurement, then a deal can be more easily achieved by allowing the master franchisee to “earn” the right to ever-increasing exclusive territories within the target country or group of countries. This approach overcomes the fear for master franchisees who are paying a lot of money for a concept that is yet unproven in their country or region and still provides the franchisor with control over the development of the system within the broader territory. Prospective master franchisees want the term of the master franchise agreement to be virtually and sometimes actually, perpetual.
Prospective master franchisees want the term of the master franchise agreement to be virtually and sometimes actually, perpetual. Franchisors want to limit the term (including renewal rights) to a period of time that allows the master franchisee enough time to earn a good return on its investment and perhaps generate some capital gain on a resale.
Assuming the franchisor would be happy with a successful and thriving system in the territory regardless of the length of the term, the number of renewal terms could expand based upon specific performance criteria that achieve that result for the franchisor, beyond the usual number of renewal terms. The message to the master franchisee is, “You can have a very long term, if you earn it.”
By Edward (Ned) Levitt, CFE