Franchising Abroad: The Two Most Common International Franchise Deals
If the first step in bringing your franchise overseas is to determine which international market is best for your brand, the second step is to decide what kind of deal you want to sign.
While there are many different kinds of agreements a company can sign, the two most common models are the master franchise agreement and the area developer agreement. Either agreement can be multi-country, single country, or regional; and in either case, a brand from outside the target country grants rights in the target county. In return, the franchisor receives a master franchise fee and royalties and/or the rights to supply product to the franchisee. While these two models share similarities, it is important to understand the differences.
Master franchise agreement
A master franchise agreement includes the franchisee's right to sub-franchise. In effect, the master franchisee becomes the franchisor for their chosen territory. That right to sub-franchise usually goes into effect after the master franchisee has opened and is operating a specified number of units.
The franchisor and master franchisee agree on a development schedule, usually with built-in performance targets. Failure to meet the development schedule can result in the termination of the agreement or loss of exclusivity. The franchisor trains the master franchisee in all aspects of the business, and turns over certain intellectual property to the master franchisee such as operating manuals, marketing strategies, recipes, and supply chain information. The master franchisee shares in the franchise fees and royalties paid by sub-franchisees; typically that split is from 50/50 to 75/25 in favor of the master franchisee. A master franchise agreement usually lasts from 10 to 20 years.
A master franchise agreement has many advantages: 1) the franchisor is able to gain a presence in the market without having to directly set up the support networks that would normally be required for franchising; 2) the model unambiguously clarifies responsibilities between franchisor and master franchisee in respect to the recruitment of franchisees; 3) the franchisor is able to obtain significant up-front fees in exchange for franchise rights; and 4) sub-franchising allows rapid development of the system in the new territory.
However, identifying an appropriate master franchisee can be difficult. They need sufficient capital, operating capacity, and business savvy to develop the territory, but they also must be willing to follow the system. And although it is more difficult to ensure compliance with the system and consistency of service across the network with this multi-tiered franchise structure, those drawbacks can typically be managed.
Area developer agreement
In an area developer agreement, the franchisor signs with an area developer to open an agreed-upon number of units over an agreed-upon period of time. These agreements usually grant exclusivity in the territory. The area developer fees are based on the number of units, and the area developer pays a royalty to the franchisor. The franchisor agrees to train the area developer in all aspects of operation of the business, and then the area developer operates or oversees operations of all units. Area developer agreements do not grant the right to sell sub-franchise licenses.
Benefits of an area developer agreement include 1) a closer relationship between franchisor and franchisee, 2) tighter control of the brand because there is no right to sub-franchise, and 3) a more straightforward agreement. Entry cost for smaller developments is also often lower than a master franchise fee, so there is a larger pool of candidates for the franchisor, and existing operators can become area developers. However, brand development may be slower as the area developer has to open and finance all units.
Both types of agreements include reasons for termination, levels of ongoing support, governing law, currency considerations, trademark registration (which should always remain property of the franchisor), and succession. In all cases, it must be established that the prospective multi-unit franchisee has the capital, operating capacity, experience, infrastructure, industry expertise, and, of course, the integrity to take your brand to an international market. With the quality of your franchisee assured, either a master franchise agreement or an area developer agreement will jump start your growth abroad.
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