When planning to expand its franchise network in a new market (particularly in another province or another country), the master franchise is generally the first development model that comes to mind to the franchisor (and to its legal counsel).
Although granting a master franchise presents real advantages, it remains a somewhat complex transaction (since the franchisor franchises both its system and a portion of its franchisor’s operations in the contemplated territory) and presents serious risks (including development underperformance in the contemplated territory or dissension with the master franchisee).
The franchisor can very well find itself caught up in a difficult situation in a faraway territory when attempting to terminate its business relationship with a master franchisee that is not developing, or not managing, the network properly in its territory.
What happens to franchises already granted by the master franchisee and those which are then in development?
Should the franchisor take back the control of the network in the territory, which is exactly what it was trying to avoid by granting a master franchise?
Other development models are also sometimes used, including the joint venture and the territorial development agreement with an agent representing the franchisor in the contemplated territory and performing, in the name and on behalf of the franchisor, certain duties relating to the role of franchisor.
Each of these models offers certain advantages, but ultimately raises risks somewhat similar to those of the master franchise.
A network development model that we see more and more often in domestic franchising (i.e. markets already being served by the franchise network), but which is still underestimated for interprovincial or international development is that of the multi-unit franchise.
In this model, the franchisor grants to the franchisee, referred to as a “multi-unit franchisee”, the exclusive right to open and operate several franchised businesses in a territory that will remain exclusive as long as the multi-unit franchisee meets the agreed-upon development targets set out in the agreement.
However, the multi-unit franchisee must open and operate itself (often through subsidiaries) each franchised business and cannot grant sub-franchises (although in certain cases, the agreement allows the multi-unit franchisee to have minority shareholders in these subsidiaries provided that appropriate measures are implemented to avoid a subsidiary eventually falling under the control of a person other than the multi-unit franchisee itself).
For this model, it is obviously necessary to find a multi-unit franchisee that has the necessary resources to build, equip, manage and operate all of the businesses provided in the agreement according to the development schedule provided for therein.
Therefore, this model might well be appropriate for multi-unit franchisees that are already in business and that operate other businesses in sectors that may be complementary to the franchise network.
Contrary to most other development models, this particular model sets up a simple direct franchisor-franchisee relationship and the franchising relationship includes no other persons (such as sub-franchisees) with whom the franchisor only has an indirect relationship.
In the event a multi-unit franchisee does not meet its development objectives, the only consequences (which must obviously be clearly stipulated in the multi-unit franchise agreement) are: (i) the loss of its territorial exclusivity in the contemplated territory and, sometimes, but not always, (ii) the loss of the right to open new franchises in the territory.
However, the multi-unit franchisee still remains a franchisee for its existing businesses.
This opens up to the possibility for the franchisor to grant other franchises, single-unit or multi-unit, in the territory and, even, to eventually grant a master franchise of which the multi-unit franchisee would then become the first sub-franchisee.
In addition, if the multi-unit franchisee was to not adequately operate its franchised businesses or fail to comply with its agreement with the franchisor, it is the multi-unit franchisee that would be itself the first to suffer the consequences.
In these circumstances, the franchisor has the right to terminate both the multi-unit agreement and the existing individual franchise agreements and then have the option of (i) acquiring the existing franchised businesses from the multi-unit franchisee, or (ii) leave the existing franchised businesses under the control of the multi-unit franchisee, in which case the multi-unit franchisee would be required to desidentify them completely and comply with certain confidentiality, non-solicitation and non-competition undertakings in favour of the franchisor.
This model is therefore simpler and less onerous for the franchisor in the event of sub-performance by the multi-unit franchisee or of termination of the agreement.
It can also serve as a preliminary step, or trial period, prior to the granting of a master franchise that, in such a case, is only granted after the multi-unit franchisee will have demonstrated its abilities, both as a network developer and as a franchise operator.
This also allows the franchisor to get to know the franchisee and to establish a solid business relationship before having to take the important decision to grant a master franchise.
Like any other development model, the multi-unit franchise is not a panacea and is not ideal for all franchisors.
However, this model should be considered more often than it is presently being used.
Fasken has all the expertise and necessary resources to properly advise you and accompany you in all aspects of the launch, management and expansion of your network, including relating to the most appropriate choice of development model for you.