Term and territory
Prospective master franchisees typically seek as long an initial term as possible, whereas franchisors prefer to limit it and impose shorter renewal terms thereafter, so as to exercise as much control as possible. These seemingly opposing viewpoints are somewhat reconcilable, however, considering the objective of the shared business relationship.
Franchisors know the initial period should be long enough for the master franchisee to break even on his/her initial investment, at the very least, with that investment comprising the initial franchise fee and any other out-of-pocket expenses. Performance-based renewal terms are very common and will generally be favourable to both parties’ growth. Franchisors must also keep in mind, however, if they end up cycling through a series of master franchisees for a given territory, the process of expansion will be inefficient and, even worse, will hurt their brand.
Negotiating the territory is similar to negotiating the term. As the master franchisee, you will want as broad a territory as possible in the event the expansion proves successful. The franchisor, conversely, may seek to limit the exclusive territorial rights it grants to master franchisees, so as to avoid underdeveloped regions and/or underperforming franchisees due to a lack of sufficient, direct support.
The goal of the negotiation process should be to balance any opposing views on this matter, but there are also other factors to consider. While your intention in seeking a large territory is to maximize your profits, for example, smaller territories can in fact prove more profitable for both the franchisor and the master franchisees in the long run. For one thing, a franchisor with multiple master franchisees in adjacent territories can react more quickly whenever one of those territories is underperforming in terms of franchise expansion, either by stepping in itself or by letting another master franchisee take over. This helps ensure standardization, which is essential to any franchise brand. Master franchisors are often under considerable pressure to meet a development schedule for expansions, such that they can easily lose sight of supporting their existing franchisees, to the detriment of the entire system.
In the end, a franchisor will typically grant a specific initial territory to a master franchisee with the option of increasing the size of that territory in the future, as the master franchisee proves successful in meeting various performance quotas. And a similar protocol can be applied to renewal terms.
More than half of Canada’s 10 provinces currently have franchise legislation, with British Columbia being the most recent to enact its own, in February 2017. In each of these provinces, the legislation requires all MFAs to be governed by the laws of the jurisdiction in which the master franchisee is situated—and any disputes resulting from the MFA must be heard by the same province’s legal system. This puts master franchisees at a significant advantage over their franchisors and, for that matter, over their peers in other provinces, as local laws will seek to limit the imbalance of contractual power in favour of the franchisor.
Along with the increasing number of provincial franchise statutes, there has been a significant increase in court rulings on franchising matters. These can help provide guidance for any future litigation settlements.
In provinces where there is no applicable franchise legislation, foreign franchisors will typically require their MFAs to be governed by the laws of their own country or jurisdiction. Yet, it may actually be advantageous for both parties to elect to be governed by the laws of the master franchisee’s province, such as in the context of an injunction where time is of the essence. Enforcing a foreign court order can prove costly and lengthy, in effect diminishing the impact of the injunction.
Striking the right balance
MFAs can be strong foundations for new business opportunities. A foreign franchisor may find it daunting to venture into a new jurisdiction, particularly where there are significant cultural, linguistic, legal and regulatory differences, but a well-negotiated and well-drafted MFA can bridge this gap and fuel future expansion. The key is to strike the right balance between the control of the brand on one hand, which is necessary to ensure consistency, and the ability of the master franchisee to successfully tap into a new market for that brand, with thorough local knowledge, on the other. The resulting arrangement can be very profitable for all parties involved.
Olivier Bouvier-Johnston is an associate at Lavery de Billy LLP, based in Montreal. For more information, contact him via e-mail at firstname.lastname@example.org.