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      With the exception of foreign franchisors entering into the United States, don’t expect a lot of U.S. – based franchisors to offer a master franchise relationship today. Although it is still used to some extent by U.S. franchisors internationally – and the trend is shifting away from master franchising to multi-unit development relationships, as technology and other advancements have made it possible to better directly support franchisees internationally – its popularity is waning.

      If you are a franchisor looking at developing internationally, and that includes foreign franchisors entering the United States, we recommend that you first consider going direct and offering a multi-unit development agreement and not use a master franchise relationship. By franchising directly to multi-unit franchisees, you avoid the need to share the fees and other revenue in a market and retain most of the benefits of master franchising. Technology has reduced the need for master franchising to a very great extent, and with a well-structured multi-unit development growth strategy, much of the expected benefits of master franchising are no longer as significant.

      There are occasions where master franchising still makes sense, and in those circumstances both of your authors still use it with our clients. But rarely today is it our first choice, and we generally explore other approaches first.

      Both an area representative and a master franchisee acquire a territory in which to solicit and support franchisees, and both share in the initial and continuing fees collected from franchisees with the franchisor. The difference is that the area representative is not a franchisor, does not deliver their own FDD, and doesn’t execute any agreements with the franchisees. In essence, an area rep is a commissioned sales and field support person for the franchisor.

      As in a master franchise relationship, the area representative pays the franchisor a market development fee for the opportunity to develop and provide services to a specific minimum number of units, during a specified time period in a defined area. Once recruited, the franchisees sign their single-unit and multi-unit development agreements with their franchisor.

      For many of the same reasons discussed earlier related to master franchising, the use of area representatives is on the decline. An area rep can recruit franchisees quickly. But because they share in the franchisor’s fees, rather than earn their income as an employee, there is a strong argument that they tend to depress the exit or enterprise value of the franchisor despite their potential advantage in recruitment. When the franchise system is sold, the buyer of the system will value the continuing revenue stream available, and sharing of royalties with an area representative will reduce the value of the system to the buyer.

      Area reps also are focused more on expansion and less on supporting the franchisees. Should that occur, the franchised businesses in their area – if not in the entire franchise system – suffer, and there is the potential for a higher level of closures and litigation.

      There are ways to address some of the downsides of an area representative relationship by structuring the rep’s role and modifying their fee arrangement to be based on the performance of the locations in their area. Still given the downside risks and the availability of alternative growth strategies, we would expect the use of area representatives to continue to decline.

Figure 2-4 displays the typical area representative relationship.

      © John Wiley & Sons, Inc.

       FIGURE 2-4: The area representative family tree.

Sharing Risks and Rewards in a Joint Venture

      Think of a joint venture as a form of partnership between a franchisor and a franchisee. Different from a standard franchisor-franchisee relationship, generally each party contributes assets to the joint venture, and each shares in the profits and losses of the entity they form. What each party contributes will vary greatly from one joint-venture relationship to another.

      In a simple joint-venture relationship found in franchising, the franchisor identifies a strong operator as its joint-venture partner. The franchisee and the franchisor (the franchisor usually establishes a subsidiary or separate entity for this purpose) form a joint-venture entity, and that entity signs a franchise agreement with the franchisor. The franchisee participant operates the franchise for the joint venture and earns a separate fee for doing so. The franchise agreement is a standard agreement, and generally the fees and obligations are the same as with any other franchisee.

      The joint-venture agreement will also define the rights and obligations of each party as you would find in any partnership agreement. Common elements would include limitations or restrictions on the franchisee joint-venture partner to dispose of certain assets, acquire debt, or take other specified actions. Formulas or methods are also included to allow for cross defaults and, most importantly, how to unravel the relationship, should that be required.

      Several franchisors have used joint-venture relationships both in the United States and as part of their international expansion, but it is not a common structure because it is complicated, somewhat difficult to manage, and creates difficulties should the relationship need to be terminated and unwound.

Councils, Associations, Cooperatives, and Buying Groups

      Most modern franchise systems will establish at some point a franchisee advisory council (FAC). Whether elected by the franchisees in the system or appointed by the franchisor, the purpose of the FAC is to be a sounding board for the franchisor. Although the FAC doesn’t have any decision-making powers, it’s an important part of most franchisors’ processes for evaluating changes to the system, recommending improvements to the system, and testing new ideas by obtaining the input of operating franchisees.

      Associations, cooperatives, and buying groups are different. These groups are generally formed either independently by franchisees or in conjunction with the franchisor and may be separate legal entities.

      Historically, franchisee associations were created when some event occurred that put the franchisees and the franchisor at odds with each other. In most instances the franchisees would join the association and pay dues. Generally, the first hire of the franchisee association would be an attorney to represent the association in discussions or litigation with the franchisor. Franchisee associations were therefore not looked upon fondly by franchisors – were seen as sort of a franchisee union – and the nature of the relationship was often contentious. As franchising has matured, many franchisors have established beneficial relationships with franchisee associations, although most franchisors still prefer to work through their FAC and not through a franchisee association.

      A buying group or cooperative is established

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