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
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