The orphaned unit franchisee: how to manage them after termination of a master franchise relationship


When designing an international multi-unit franchise relationship, it is beyond question that the most important factor is choosing the right international partner. Once you believe that you have found that ideal partner you will need to choose the best vehicle to structure the business relationship. The two most conventional international development structures are the area development agreement and the master franchise agreement. Under the former the franchisor maintains a direct relationship with its international partner, while under the latter, which currently is the preferred structure in international franchise relationships, the master franchisee is granted the exclusive rights to develop a designated territory primarily through a sub-franchise relationship with its unit franchisees. If the master franchise route is chosen, one issue that is given less attention is the ultimate disposition of the operating units upon the termination of the master franchise agreement. The franchisor’s right to assume the sub-franchise agreement, or step-in rights, are often lost in the negotiations of initial franchise fees and royalty splits, but can greatly affect the ultimate sustainability of a franchise system’s international expansion in the chosen market.

The ability of the franchisor to bring about its assumption rights in the master franchise model can be more problematic than is the case with an area development agreement. The direct relationship between the franchisor and the unit franchisee in the area development model gives the franchisor direct access to the unit businesses upon termination of the master franchise agreement without having to navigate the relationship issues between the master franchisee and the unit franchisees. Conversely, in the master franchise relationship, with a more attenuated link to the unit franchisee, the franchisor’s ability to assume the unit franchise relationship will be tempered by a number of access and relationship considerations that will be influenced by the language in the governing master franchise agreement and the individual unit franchise agreements.

Originally published in International Franchising Newsletter on October 11, 2013.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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