Negotiating a Master Franchise Agreement can be complex, challenging and demands careful thought and patience.

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.

Dividing up the Spoils and Job Allocations

Without a doubt, the most poorly handled issue in master franchising is the division of the front-end franchisee fees and continuing royalty fees for the unit franchises in the territory between the franchisor and the master franchisee. It is not unusual for the franchisor to base the decision on the allocation of these fees on the anticipated or desired return from the development of the system in the territory without serious or careful regard for how the master franchisee will finance the necessary development and support services for the unit franchisees. Mistakes with this issue will either ensure the demise of the master franchisee or reduce the quality and performance of the system in the territory.  Additionally, presenting unrealistic numbers to a sophisticated prospective master franchisee can wreck the deal.

The responsibilities for the development and administration of the system should be decided first as between the franchisor and master franchisee. Then the division of the various fees should be based upon the costs of discharging those responsibilities and only after that should the parties divide up the remaining “profits.”  Being able to provide proof of a careful analysis of these matters will go a long way to getting the deal done with the best candidate.

Selection of Unit Franchisees and Locations

Often, master franchisees want the right to select unit franchisees and locations within their territory, but franchisors do not want to abdicate the responsibility for final approval of franchisees and locations before the master franchisee has proven to be capable in these crucial areas.

By proposing an initial fixed number of franchisor approvals, subject to specific achievements of the master franchisee, with a resumption of the requirement of franchisor approvals in the future if other criteria are not met, the franchisor can overcome a common challenge to concluding negotiations.

Governing Law

Both parties are understandably more familiar and, therefore, more comfortable with the legal regime in their respective home jurisdictions.  To avoid another obstacle to getting the deal done, the franchisor should consider having the governing law of the agreement be the most appropriate law depending upon the issue, with some issues being determined by the law of a third jurisdiction acceptable to all.

While the governing law provision of the agreement will be more complex than usual, the extra comfort level of the parties will make it easier to finalize the agreement.

Franchising is one of the best and most efficient ways of expanding a business.  Once a solid foundation is built for the success of the system in the home jurisdiction, international expansion is a sensible and potentially profitable strategic choice.  A poorly executed international expansion can drain the resources of the franchisor to the point of destroying the entire system.  The moral being that it is less important what you do than how you do it.

Getting to yes, with the best candidates, for the right master franchise agreements can go a long way in ensuring that international expansions are profitable and satisfying for the franchisor.  The foregoing has only touched the surface of a complex and challenging area of negotiations.  It is not “rocket science,” but it does demand careful thought and patience.

By Edward (Ned) Levitt, CFE

Source: franchisingworld.com

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Negotiating a Master Franchise Agreement can be complex, challenging and demands careful thought and patience.

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.

The term

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

Source: franchisingworld.com

L'articolo Negotiating a Master Franchise Agreement (Part 1) sembra essere il primo su KnowHow Franchising Academy.

Franchisors are often sued for injuries occurring on the premises of their franchisees simply because the injured person and his attorney do not understand the nature of franchising.

Most franchisors prescribe standards for operation by their franchisees that are designed to produce the highest quality product or service in a clean, safe environment. However, franchisees do not always follow these standards, and even when they do, accidents happen. With some personal injury lawyers suggesting that every injured person has someone he can sue for his injuries, it is inevitable that lawsuits will arise and the franchisor will be named in the lawsuit simply because its trademark was on the door. This article will explain how a franchisor can reduce its exposure to liability for these actions.

The Theory for Suing the Franchisor

Franchisors are often sued for injuries occurring on the premises of their franchisees, or caused by a franchisee’s actions simply because the injured person and his attorney do not understand the nature of franchising.

They believe that every McDonald’s or Burger King restaurant is owned by McDonald’s Corporation or Burger King Corporation. That is why a telephone call to the plaintiff’s attorney is always the first step in defending these actions, as the attorney may be willing to drop the franchisor from the lawsuit when they learn the franchisor was not the owner of the business.

However, there are two legal theories by which franchisors can be liable for these actions. One is the concept of “actual control,” where the franchisor controlled the action that led to the injury, or exercised so much control over the overall business that it is treated as owning that business. The other is a theory known as “apparent authority,” meaning the customer thought this was a company-owned location.

Actual Control

The law has always recognized that if you have an employee or agent who acts at your direction, you are liable for their actions. A franchisee is not an employee, but if he is acting at your direction, and that direction causes injury to the customer, then you are liable to that customer, even though it was not your business. For example, if you tell a franchisee to cook food at a certain temperature, and that temperature is too low to kill bacteria, then you will likely be liable for the consequences of your franchisees’ actions when they follow your directions.

The theory of “actual control,” also arises when you control so much of the business activities of your franchisees that you are truly controlling the business. While you need to prescribe standards that relate to the delivery of your service or product, review your operations manual to be certain you are not trying to control other aspects of the business.

A good rule of thumb is that you can prescribe standards for everything the customer sees (with exceptions for pricing), but you should do no more than suggest “best practices” for aspects of the business that a customer does not see. The latter would include hiring practices, compensating and overseeing employees, dealing with suppliers of products and services not central to the system, and similar matters.

Likewise, your standards for producing and delivering your service or product should typically be minimum standards, including specifically addressing policies designed to prevent injuries, but giving franchisees discretion to go beyond your minimum standards or requirements where it is appropriate to do so (particularly in providing a safe environment for employees and customers).

Injured persons will often point to your operations manual, and the requirement of your franchise agreement that franchisees must comply with the operations manual, as evidence of your control of the business. Thus, beyond reviewing your manual and deleting unnecessary controls, you should include in your franchise agreement an acknowledgment by the franchisee that the manual is designed to protect your standards and systems, and your names and marks, and not to control the day-to-day operation of the business. If your manual includes suggested best practices, your agreement should also make clear that the franchisee is only required to comply with mandatory provisions of the manual.

Apparent Authority

Even when you do not control the franchise business, you can be held liable for the actions of your franchisees if the public (or an employee) does not know that you do not own the business. There are, however, a number of ways to protect against such a claim.

In a business such as a restaurant, hotel or retail store, which has a physical location, there should be a prominent sign showing the name of the owner of the business and the fact that they are a franchisee of your brand. For example: “This Amy’s Lemonade stand is owned by Local Franchisee, LLC, an independent franchisee of Amy’s Worldwide, LLC.”

Some franchisors will even present the sign to their franchisees at the conclusion of the initial training, as a plaque recognizing they are ready to open their business. For this sign to be effective, the franchisee must place the sign in a prominent location where every customer will see it, such as on a front door, or by a front desk, ordering station or cash register. If the business has multiple points of entry, or a drive-through window, it would be a good idea to have a second sign.

For service businesses and franchises that are not destination businesses, this notice should be placed on proposals, order forms, and contracts with customers, preferably at the top or just above the customer’s signature. Further, any contract the franchisee signs with its customers should contain the legal name of the franchisee with whom the customer is contracting.

Consumer advertising is also a place where you can make clear to consumers that you do not own the business they are patronizing. Phrases such as “each location independently owned and operated,” on all advertising materials (including your website), tells prospective customers that you do not own every location. While it only takes one notice to alert a customer that an independent franchisee owns the business, the more places you can put these notices, the less likely someone will credibly claim they thought you owned the business.

When All Else Fails

Despite your best efforts to select qualified franchisees, establish policies designed to prevent injuries, avoid controlling the business of your franchisees, and educate the public as to the ownership of the business, you may still be named in a lawsuit. There will also be plaintiff’s attorneys who refuse to understand the franchise relationship or demand payment of “ransom” to go away. Your franchise agreement should have a provision requiring your franchisee to indemnify you in these situations.

Because franchisees do not always have the resources to make good on their indemnifications, your franchise agreement should contain provisions requiring your franchisees to obtain insurance and name you as an additional insured. It generally costs nothing for franchisees to name you as an additional insured, and when they do, you will be able to tender the claim to the franchisee’s insurance company, rather than to your own attorneys. Review your insurance provisions with a qualified insurance broker to be certain the insurance requirements are sufficient for your particular business.

Obtain an annual certificate of insurance from your franchisees, confirming they have purchased the required coverage and named you as an additional insured. Doing so is a final safety net in trying to avoid the high cost of litigating these vicarious liability claims, and bearing the ultimate responsibility for the actions of your franchisees.

Source: franchisingworld.com

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