The Pros and Cons of Master Franchisee Relationships
March 16, 2023In the traditional franchise relationship, franchisors work directly with franchisees to provide training, approve advertising material and otherwise support their franchisees through the various stages of the business. In some systems, however, franchisors delegate their support requirements to master franchisees, also commonly known as area representatives.
If you are a potential franchisee looking into a system that utilizes master franchisees, or if you are considering becoming a master franchisee yourself, it is important to understand how master franchise agreements work.
What Is a Master Franchisee?
Those who become a master franchisee are individuals who step into the franchisor’s shoes to provide support and advice to franchisees in a particular area. They also commonly recruit potential franchisees and sell franchises within that area. Master franchisees are not the franchisor’s employees. They are actually far more similar to the “unit franchisees,” or the franchisees they recruit and support.
Just like unit franchisees, master franchisees receive a franchise disclosure document (FDD), sign a franchise agreement and pay an initial franchise fee. However, instead of (or in addition to) being granted the right to open and operate a franchised location, the master franchisee will provide support to unit franchisees in a designated area, and in many cases have the right and obligation to recruit and sell franchises to new franchisees. In return, master franchisees generally receive a portion of the royalties and other fees the unit franchisees pay to the franchisor.
Why Do Some Franchisors Rely on Master Franchisees?
Franchisors may decide to use master franchisees for a variety of reasons. In systems experiencing rapid growth, master franchisees can allow the franchisor to support more franchisees without hiring additional staff, thus lowering the franchisor’s costs while increasing bandwidth.
Master franchisees may take on many of the franchisor’s support obligations — from providing initial training to serving as the franchisee’s contact person for everyday issues.
Franchisors may also utilize master franchisees to quickly grow a system or expand in new areas. Master franchisees often have to meet development schedules, or in other words, they must sell a certain number of franchises during defined periods. Because of this, franchisors know that the master franchisee will be diligently marketing the franchise opportunity in their territory, allowing the franchisor to focus their efforts elsewhere.
Franchisors may also simply grow to the size where providing individualized attention to franchisees is impractical. Bringing on a master franchisee provides support the franchisor otherwise could not offer.
Things to Consider Before Joining a Franchise System With Master Franchisees
There are pros and cons to joining a system that uses master franchisees to provide franchisees with some or all of the initial and ongoing support and training the franchisor would otherwise provide.
The first thing to consider is the master franchisee themselves. In many instances, the master franchisee may have been the potential franchisee’s main point of contact throughout the sales process. In other instances, the potential franchisee may have only dealt with the franchisor’s sales team and may not actually be introduced to the master franchisee until later on. Either way, it is important to try to gauge the master franchisee’s qualifications, experience and personality to ensure they will be able to provide competent support and be easy to get along with.
One of the best ways to check if the master franchisee will provide the support you need is to talk with other franchisees who work with them. The potential franchisee should ask questions, which include:
- What support the franchisor versus the master franchisee provides
- Is the master franchisee is easy to get ahold of
- Whether the master franchisee provides helpful and valuable advice
- Is the franchisor available to provide support if the master franchisee is unavailable or unhelpful
How a Master Franchise Agreement May Impact Franchisees
Although it is important to attempt to determine the quality of the master franchisee prior to purchasing, potential franchisees should also be aware that the master franchisee could change during the term of the franchise agreement. As with other franchise agreements, a master franchisee’s franchise agreement may be assigned and will have a limited term. At the end of that term, it is possible that the master franchisee could choose not to or may not be allowed to renew the franchise agreement.
If that happened, the franchisor would either step in to provide services to the franchisees of the former master franchisee or the franchisor could appoint a different master franchisee to serve the area.
Additionally, master franchise agreements will allow the franchisor to terminate the master franchisee in various situations; for example the master franchisee’s failure to meet development schedules. This would again result in the franchisor or another master franchisee providing services to franchisees. The level and quality of support provided by the franchisor or another master franchisee could differ significantly from what franchisees are accustomed to.
The next thing to consider when evaluating a system that uses master franchisees is to examine what support obligations fall to the franchisor and what the master franchisee is responsible for.
These obligations can vary significantly among franchise systems. The franchisor in one system, for example, may decide to provide all pre-opening assistance and training to the franchisee itself and only delegate post-opening support to the master franchisee. Other franchisors may place all training and support obligations on the master franchisee.
Even With a Master Franchise Agreement, Changes Occur
Franchisees should keep in mind franchisors can generally change the division of support among franchisors and master franchisees during the term of the franchisee’s franchise agreement.
For example, the franchisor may choose to provide all training to franchisees when the franchisee signs its agreement, but soon after decide to delegate the requirement to provide ongoing training to a master franchisee. Franchisees would generally be unable to stop this change, even if the master franchisee provides inadequate or unsatisfactory training. Conversely, the franchisor could decide to take on some of the master franchisee’s former obligations, even if the franchisor is harder to reach or takes longer to respond than the master franchisee.
Franchisees may want to consider attempting to negotiate some limits and protections in their franchise agreements before purchasing a franchise in a system with master franchisees. Franchisees, for example, could argue for a provision that requires the franchisor to step in and provide support if the franchisee finds the master franchisee’s services unacceptable.
Franchisees could also try to negotiate some limits on the franchisor’s ability to delegate certain tasks, such as training, to master franchisees. Even with some contractual safeguards, it is still important for franchisees to consider all of the potential pros and cons before moving forward.
Considerations Before Becoming a Master Franchisee
There are also a number of things potential master franchisees should consider before deciding to enter into a master franchise agreement.
First, there are various state and federal laws regulating franchise sales and the franchise relationship. Potential master franchisees should take great care to learn the ins and outs of these laws before signing the agreement, as the laws will have a significant impact on the master franchisee’s business.
Although franchisors may provide some training on how to comply with various franchise laws, potential master franchisees should still seek out their own information. Failing to comply with the laws could result in significant liability, even if the master franchisee makes mistakes inadvertently.
Provisions Master Franchisees Can Negotiate For
There are a number of common provisions in master franchise agreements that potential master franchisees should try to negotiate.
First, it is imperative that any development schedule is fair and reasonable and that a breach of the development schedule will not result in the master franchisee’s immediate termination. Instead, master franchisees should attempt to negotiate a cure period where they are able to attempt to get back on track with the development schedule before the franchisor takes any adverse action.
Similarly, the master franchisee could attempt to limit the franchisor’s ability to terminate the agreement for a failure to meet the schedule and instead could negotiate other actions the franchisor could take, such as reducing the size of the master franchisee’s territory in lieu of termination.
The master franchisee should take care to negotiate that the franchisor can only remove unsold portions of the territory, thus ensuring that the franchisor cannot remove parts of the territory occupied by high-performing franchisees and the master franchisee’s entitlement to a portion of the high-performing franchisee’s royalties.
Master franchisees should be aware that franchisors will generally require the master franchisee to agree to the franchisor’s then-current master franchise agreement upon renewal. Therefore, if the master franchisee is able to negotiate more favorable terms into any of these provisions, they should also try to negotiate a provision that requires the favorable terms to be included in any renewal. Otherwise, it is possible for franchisors to significantly modify the agreement upon renewal.
Expertise With Becoming a Master Franchisee and Franchise Agreements
If you are considering becoming a master franchisee, purchasing a franchise in a system that uses master franchisees, or want more information about master franchise agreements, talking with an experienced franchise attorney can help you fully understand the pros and cons of master franchising to allow you to make an informed decision. Contact the attorneys at Garner, Ginsburg & Johnsen P.A. today.