Buying a Franchise in Canada. Tony Wilson

it may be difficult to solicit new franchisees let alone service existing ones very well if there is no presence in the “faraway territory.” Although travelling between BC and Ontario may be good for someone’s frequent flyer points, distance makes it difficult to promptly service an existing territory or expand into a new one. (You just can’t drive there in an hour for a meeting or a surprise visit, so out of sight can truly be out of mind.) Master franchising allows the franchisor to rely upon the skills, acumen, risk capital, infrastructure, and local knowledge of someone within the territory to solicit for new franchisees, open stores on its own account, and service existing franchisees.

      Unit franchisees should be aware that their contract will normally be with the master franchisee and not with the so called “head franchisor.” Accordingly, the master franchisee is the only party the unit franchisee can obtain a legal remedy from because the franchisor in the US or the UK isn’t a party to that agreement. The franchisor in Fort Lauderdale does not want a phone call from a disgruntled unit franchisee in Winnipeg. It’s the master franchisee’s franchisee; it’s the master franchisee’s problem. Unit franchise agreements that contemplate the existence of a master franchisee will normally contain a provision that provides that if the master franchisee should ever be terminated, the franchisor will step into the shoes of the master franchisee. All royalties and other monies due and owing to the master franchisee will then be payable to the franchisor and not the master franchisee.

      2. Cost of Becoming a Master Franchisee

      It is beyond the scope of this book to advise on master franchise agreements or to analyze a master franchise agreement in the same detail that we are analyzing the unit franchise agreement in Part 2. Suffice to say, however, that the cost to acquire master franchise rights for a province or a group of provinces (or for that matter a part of a province or the boundaries of a large city) will be larger than what would be charged to acquire the franchise rights for one location only. The franchisor may do an analysis of the territory and determine that the master franchised territory will be able to support 40 outlets over a ten-year period.

      Perhaps the price to acquire master franchise rights will be a product of the franchisor’s forgone income in not exploiting the territory itself. The price might be some factor of 40 initial franchise fees and 40 royalty streams.

      From practical experience, when a master franchisee is franchising individual locations to the “unit franchisees” or “sub-franchisees,” the initial franchise fee and royalties may well be higher than if the franchisor was doing this on its own account. For example, a US-based franchisor may charge $25,000 USD for the rights to open a XYZ bagel emporium in the city of Seattle. If the US franchisor has entered into a master franchise agreement with a British Columbia-based company to master franchise the same concept in BC, the initial franchise fee may in fact be the equivalent of $30,000 USD; the $5,000 differential being paid to the franchisor on the signing of each unit franchise agreement.

      The royalties may also be slightly higher for Canadian unit franchisees when compared to their US counterparts who franchise directly from the “head franchisor.” This is because the Canadian master franchisee will normally have to pay a percentage of the royalty it collects from individual franchisees to the franchisor.

      3. Performance and Development Obligations of the Master Franchisee

      The master franchisee will normally have “development obligations” under its agreement with the head franchisor. Such development obligations will often prescribe that “so many” stores will be opened in the first year followed by a higher number in the second and a still higher number in the third year. Failure to meet these performance obligations might well lead to the termination of the master franchise agreement (and the master franchisee’s rights) or the franchisor could reduce the size of the master’s territory or make the territory “non-exclusive,” entering into other master franchise agreements with other entities.

      In order to meet such performance obligations (or because it wishes to reserve the best locations for itself), the master franchisee in the territory may decide to open up its own “corporate” locations that will also be subject to a sub-franchise or unit franchise agreement in each case. It is desirable that the master franchisee have some corporate stores, if for any other reason, to have day-to-day familiarity with the business just like the franchisees.

      4. Negotiating a unit franchise agreement with a Master Franchisee

      It may be difficult, if not impossible, to negotiate the unit franchise agreement with a master franchisee, not because master franchisees are inherently difficult and unaccommodating people, but because their contract with the franchisor may prohibit or severely restrict the master franchisee’s rights to modify the unit franchise agreement. Normally, the form of unit franchise agreement the franchisor requires its master franchisee to use (with the master’s unit franchisees) is appended to the master’s contract with a requirement not to modify the form without the franchisor’s prior written consent. US-based franchisors are very reluctant to agree to change any part of their agreements for the following four main reasons:

      1. They don’t want wacky, one-off side deals floating around the known world.

      2. “This is my contract, and if you don’t like it, find another franchise.”

      3. They don’t want franchisees comparing who got the better deal and coming back to the franchisor to negotiate different deals.

      4. Separate deals may adversely effect their own disclosure obligations under US franchise laws.

      There are variations on this agreement, such as in cases in which an individual or corporation is not granted master franchise rights, per se, but rather is granted the right to find prospects, sign up franchisees who sign an agreement with the franchisor, and service existing franchisees within the territory in exchange for a portion of the initial franchise fee and a portion of the ongoing royalties, or on some other financial arrangement. This might be called a multi-unit area franchise.

      Part 2

      THE FRANCHISE AGREEMENT