Buying a master franchise is a very different proposition from buying a single-unit franchise—or even entering into an area development agreement. As a master franchisee, not only might you be tasked with opening one or more franchised outlets of your own, but you will also be responsible for selling franchises and managing independent franchisees within your master franchise territory.
As a result, buying a master franchise involves legal risks above and beyond those involved with buying an individual franchise or the right to develop a particular geographic area on your own. Some examples of these legal risks include:
FTC Rule and State Franchise Law Compliance
As a master franchisee (also referred to as a “sub-franchisor”), you will be selling franchises in your territory. This means that you will take on the disclosure obligations of a franchisor, and you will be at risk of facing liability due to disclosure violations. Your franchisor will most likely provide you with a Franchise Disclosure Document (FDD) to use in your territory; and, if it does, you should be able to seek indemnification in the event that you are held liable as the result of an issue with the FDD. However, there is also a very good chance that this is a protection that you will need to seek to negotiate into your master franchise agreement.
Master Franchise Agreement Compliance
Speaking of the master franchise agreement, the terms of your master franchise agreement will be very different from the terms of any franchise agreements you sign in order to develop individual units in your territory. When reviewing and negotiating your master franchise agreement, you will need to do so with your specific duties and the unique nature of the relationship in mind, and you will want to rely on the advice of an experienced franchise attorney to ensure that you are not agreeing to unreasonable and unmanageable compliance burdens.
Liability for Individual-Unit Franchisee Claims
When serving as a master franchisee (or sub-franchisor), you will face unique liability risks. In addition to facing potential liability for disclosure violations based on the contents of the franchisor’s FDD, as a master franchisee, you will be on the front lines for any other disputes with individual-unit franchisees as well. For example, if franchisees in your territory are dissatisfied with a mandatory purchasing or supplier arrangement (or any other system-related issue), they will almost certainly look to you before they look to the franchisor.
If your franchisor is ultimately responsible for an issue that arises, you will need to ensure that your master franchise agreement provides adequate protections. Again, this is not likely to be the case unless you work with a franchise attorney to negotiate these protections into your contract.
Schedule a Free Initial Consultation with Franchise Attorney Jeffrey M. Goldstein
Jeffrey M. Goldstein is a nationally-recognized franchise attorney who has more than 30 years of experience representing franchisees and dealers. If you are considering a master franchise purchase and would like to speak with Mr. Goldstein, you can call 202-293-3947 or contact us online to arrange a free initial consultation.
