If you are a franchisor and looking for new ways to grow your franchise network, you may want to consider the different types of franchise agreements and which one is best for your business needs. There are a number of different agreements which change the rights being granted and obligations on franchisees. Therefore, this article will explain and compare: 

  • franchise agreements;
  • master franchise agreements; 
  • area developer agreements; and
  • area representative agreements/master agent agreements.

What is a Franchise Agreement?

A franchise agreement gives franchisees the right to operate a franchise business in exchange for a fee. Franchise agreements are tailored to the franchise network and franchisor’s requirements. Further, each agreement is unique to the franchise brand and the parties entering into the agreement. However, the Code governs every franchise in Australia and requires a franchisor to prepare and maintain a disclosure document. 

What is a Master Franchise Agreement?

A master franchise agreement is an agreement that gives national or regional rights to a master franchisee, allowing them to grant franchises to single-unit franchisees in a specific geographic territory. Therefore, this type of agreement is common where franchises are expanding internationally or interstate.

A franchisor will appoint a ‘master franchisee’ who will act as the ‘franchisor’ in a particular country or territory. This means the master franchisee will have all the obligations of a franchisor under that country’s laws. 

Additionally, a master franchise agreement will contain clauses relating to the terms and conditions of the rights granted to a master franchisee, including: 

  • performance criteria; 
  • a development schedule setting out the number of franchises to be granted; and 
  • each parties’ responsibilities and obligations under the master franchise agreement. 

Benefits and Disadvantages of a Master Franchise Agreement

While master franchises pass on a significant responsibility to the master franchisee, they can still be profitable for the franchisor. Master franchisees usually split royalties that local franchisees pay to the master franchisee between themselves and the franchisor. This gives franchisors the opportunity to continue expanding the business and making money without heavily involving themselves in the day-to-day operations.

A master franchise model is beneficial for franchisors because it allows them to exercise control over the master franchisee in the territory through the master franchise agreement. However, it limits their exposure and reduces the operational requirements in the new territory.

Additionally, it is important to recruit the right master franchisee, provide sufficient initial training, and ensure that the intellectual property (trade marks, domain names, social media accounts) have been registered, acquired and established in the territory.

The Franchising Code of Conduct

In Australia, the Code also governs a master franchise agreement. If your franchise network is expanding inter-state, you will need to make sure the master franchise agreement is still compliant with the Code.

What is an Area Development Agreement?

An area development agreement is another type of agreement. It is similar to a master franchise agreement. In an area development agreement, you will appoint an area developer to develop the franchise brand in a new territory. 

Area developers are typically required to open and operate a number of franchises in the territory within a specified timeframe. They are multi-unit franchisees. You measure an area developer’s success against a number of performance indicators. These include how many stores they establish, among other criteria.

The area developer will usually be granted an exclusive right to develop the brand in their territory. If they are successful and satisfy the relevant performance indicators, the agreements will usually allow them to open additional franchises in their area.

Benefits of an Area Development Agreement

Area development agreements can be quite useful at building up the franchise brand in a new region if you have the right franchisee. Further, an appropriate candidate is someone who embodies the business values, will grow the network and will successfully operate a number of franchise businesses.

An area development agreement is also a good option if you have not finalised your operations manual. If you have not developed specific systems at a head office or franchisor level, this is a good opportunity to allow your area developer to develop and refine their own processes and procedures. Moreover, you may choose to adopt these processes in the broader franchise network in the future.

An area developer agreement, or master franchise agreement, can also be a good way to reward franchisees that are performing well. This arrangement will outsource some of your usual franchisor obligations and give extra responsibility and revenue to your franchisee.

What is an Area Representative Agreement or Master Agent Agreement?

Unlike a master franchise agreement or area developer agreement, an area representative agreement, also known as a master agent agreement, does not give the right to grant franchises. Instead, an area representative/master agent will be responsible and receive a fee from the franchisor for recruiting and training franchisees, as well as providing assistance and oversight to the franchisees in a specific territory.

Benefits and Disadvantages of an Area Representative Agreement 

An area representative agreement can be a great way for franchisors to expand internationally or interstate and reduce their responsibilities. Rather than involving an external franchise consultant, an area representative will be more involved in the franchise network will find franchisees in a specified area. The area representative will also be able to provide more ongoing management support for franchisees reducing the overall workload for the franchisor. The downside to this arrangement is that it adds another hierarchical layer to your franchise network. This means if there is a problem, it may be harder for franchisees to escalate an issue up the chain.

Key Takeaways

Master franchise agreements and area developer agreements are commonly in use for expansion into a new country or territory. These agreements will shift responsibility away from the franchisor to the master franchisee or area developer. It is important to make sure that you draft your agreements appropriately so they reflect your business needs. If you have any questions surrounding the legal requirements and advice on setting up a franchise network, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

Do I need a licence to become a franchisee?

While there is no specific licence to become a franchisee, some franchises require special licences or permits.

What are franchise fees and royalties?

A franchise fee can include the up-front amount paid to the franchisor for the use of their name, know-how, operating systems, etc. A franchisee usually pays ongoing fees (or royalties) to the franchisor for providing ongoing business, management and technical support, etc. This fee may be fixed as a percentage of the franchisee’s turnover, which may vary as trading conditions change.

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