Expanding a franchise in Italy through Master franchising: how it works, why and when to use it

Master Franchising is by far the most common  method to expand a foreign franchise network in Italy.Through Master Franchising, the franchisor grants a business partner  based in Italy (Master Franchisee) the right to enter into exclusive sub-franchise agreements in a specific area with affiliates (sub- franchisee), granting them the right to use franchisor’s the brand and the franchise package. Therefore, the Master Franchisee basically represents the franchisor in the country involved, having direct relationships with the sub-franchisees and collecting fees directly from them. This feature distinguishes master franchising from all other legal forms of direct franchising. There are many advantages for a franchisor in resorting to Master Franchising for its international franchise expansion. In fact, Master-franchising requires less resources from the franchisor than direct franchising, involves less risk-taking and lower commitment level than other forms of international expansion, and reduces the complexity of managing the international network by reducing the number of the franchisor’s foreign partners in the Italian market.

1. What is Master franchising under a legal point of view?

Master Franchising is statistically the most frequently used method to expand a franchise network in Italy; according to the 2021 survey made by  Assofranchising  , 60% of foreign brands currently adopt this model in Italy.

Through Master Franchising, the franchisor grants a business partner  based in Italy (Master Franchisee) the right to enter into exclusive sub-franchise agreements in a specific area with affiliates (sub- franchisee), granting them the right to use franchisor’s the brand and the franchise package.

Therefore Master Franchisee basically represents the franchisor in the country involved, having direct relationships with the sub-franchisees and collecting fees directly from them. This feature distinguishes master franchising from all other legal forms of direct franchising, such as area development and area representative, agreements, whereby the Franchisor keeps a legal direct relationship with the franchisees.

On the other hand, the franchisor has contractual relationships only with the Master franchisee, and not with the sub-franchisees. This means that, in the event of non-fulfillment of the sub-franchise agreements, the sub-franchisees will be able to claim only against the Master franchisee, who will in turn be liable towards the franchisor for breach of the Master franchise agreement.

2. Legal features of master franchising agreements

The number of sub-affiliates with which the Master Franchisee shall sign sub-franchise agreements and the timing within which these agreements must be signed is usually regulated by a Development schedule, attached to the Master Franchise Agreement.

The development schedule is of outmost importance in a master franchise agreement and it is usually carefully and intensely negotiated between the parties; often it is based on a business plan that should be prepared by the Master franchisee, given it has (or should have) a better knowledge of the Italian market.

Sometimes the Master Franchisee is required, especially in the initial phase, to open its own stores, in order to get to know the franchise concept better and convince the sub-franchisees to join the network.

Generally the franchisor provides the Master franchisee with initial training, products, technical and commercial assistance. The Master Franchisee has the obligation to promote the franchise concept, identify and select the sub-franchisees, take care of the regulatory aspects. Furthermore, the Master Franchisee is generally responsible for monitoring the sub-franchisees, for training, for assistance, for monitoring compliance with the brand.

Often the territorial exclusivity granted to the Master franchisee is limited, as the franchisor reserves the right to sell the products in the territory through other distribution channels that are not part of the network (for example outlets, supermarkets, corners, internet), or use new brands, or open your own direct stores. The initially identified exclusive territory can then be enlarged or reduced, depending on the results obtained by the Master Franchisee.

When the franchisor adopts the Master Franchise scheme, he generally provides the Master Franchisee with a draft standard sub-franchise contract to which he must comply, except for exceptions dictated by the peculiarities of the reference market and by local legislation. The conclusion of contracts with sub-franchisees is in any case generally subject to the approval of the franchisor.

An important issue in structuring a master franchise agreement in the Italian territory is to avoid that the  termination of the Master Franchise relationship – for example due to default by the Master Franchisee – causes the sub-franchising relationships with foreign franchisees to cease, jeopardizing the entire network and exposing the franchisor to legal claims from part of the sub-franchisees.

To that extent, the master franchisor should be a party to each unit sub-franchise agreements – in addition to the master franchisee – to be able  to take over the local network and enforce unit franchise agreements. Alternatively, the master agreement should contain a provision allowing the franchisor, at its option, to take an immediate assignment of all unit franchise agreements upon or before termination of the master franchise agreement.

Again, it is possible to provide in the master franchising agreement that, the master franchisor does not automatically take over from the Master Franchisee in relations with foreign sub-franchisees but reserves the right to do so, deciding from time to time with which sub-franchisee to maintain relations.

3. Advantages of Master franchising

There are many advantages for a franchisor in resorting to Master Franchising for its international franchise expansion. In fact, this model:

• allows a fast expansion of the network;
•  reduces the investments typical of direct franchising form;
• allows the franchisor to adapt optimally to the peculiarities of the foreign market, thanks to the local knowledge, business skills, experience and contacts of the Master franchisee;
• allows the franchisor to share the risk with the Master franchisee, who is directly responsible to the sub-franchisees;
•  reduces the complexity of managing the international network by reducing the number of the franchisor’s foreign partners in the market;
•  reduces franchisor’s liabilities, since the master franchisee undertakes full responsibility for recruiting franchisees, and for training, servicing and supporting them.

On the other hand, master franchisees find it generally appealing to “manage” a franchise brand in their country, and to be the de facto franchisor there.

The disadvantages of Master franchising are essentially linked to the fact that the franchisor, not having direct relations with the sub-franchisees, loses to a large extent control over them, with the consequent possible negative effects on the brand and the image of the network.

Furthermore, Master Franchising ensures franchisors usually lower revenues  than direct franchise, since they do not receive royalties from the sub-franchisees but only from the Master Franchisee.

4. What is the best reason to use a Master franchising strategy in Italy?

The main reason for selecting master franchising for a franchise expansion in Italy over other growth strategies is the opportunity for the fastest form of expansion of the brand (other than the acquisition and conversion of a competing brand to the franchisor’s brand).

If the franchise concept is properly used, master franchisees can grow a franchise brand in the Italian market using the leverage of franchising much more quickly than they could by investing the same capital into developing and operating their own outlets, or by acquiring or converting a competitor.

Just as companies use franchising to grow their brands in their home markets, the idea of master franchisees using the same strategy, as taught by the franchisor, to develop the franchisor’s brand in a the Italian market makes intuitive sense.

 

Avv. Valerio Pandolfini

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The information contained in this article is of a general nature and is not to be considered an exhaustive examination of the various issues, nor is it intended to express an opinion or provide legal advice. Specific legal advice must be provided with regard to individual cases.