Expanding a franchise in Italy through Master franchising: how to face (and avoid) possible problems
Master Franchising is widely used in Italy, but of course it may have some problems, most of which can be avoided by careful foreign franchisors. Probably the most critical factor influencing Master franchise success is the inability of master franchisees to recruit sub-franchisees. This issue is closely linked to the selection of the Master franchisee, which is indeed a crucial process that should be managed by experienced local advisors and brokers. Other solutions to ensure success are to limit time and territory granted to the master franchisee, and to prepare a balanced development plan, regulating carefully the consequences in case of non-compliance by the master franchisee.
1.Master franchising: a very common method of expansion in Italy, but are there any problems with it?
Master Franchising is 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.
However, this does not mean that Master franchising is a completely problem free expansion model.
Surveys conducted by several consultants show that the most significant problems that foreign franchisors face with their Italian master franchisees are the following:
- franchisors’ lack of understanding of Italian market;
- inadequatemaster franchisee’s training;
- inability of master franchisees to recruit sub-franchisees.
As a matter of fact, the first two problems can be easily avoided by careful franchisors.
A lack of understanding of the Italian market can be easily overcome by performing a serious preliminary feasibility analysis of the Italian market, and a careful legal due diligence. If a feasibility study and/or a legal due diligence have not been done, or if they have not been done properly, than difficult problems may arise, not always easy to remedy.
Inadequate master franchisee’s training can be a major problem as well. Training and support are important to the success of master franchisees; most franchisors may not have documented properly each of the processes they follow in their day to day activities, at least in a way that can be easily usable by a master franchisee in Italy. Adequate training programs can be created, but this requires time and investment.
2.Selection of the “right” Italian Master franchisee is a crucial process
Probably the most critical factor influencing Master franchise relations and success is the inability of master franchisees to recruit sub-franchisees. This issue is closely linked to the selection of the Italian Master franchisee, which is indeed a crucial process.
While the master franchising structure is useful for spreading costs of administration, training and support, much depends on the quality of the master franchisee. A wrong choice can wreak havoc on a franchisor in the Italian market for years. Finding the “right” master franchisee can be time-consuming and expensive. The best master franchisees may also demand a better return on investment than ones of lesser quality.
A Master Franchisee should have the necessary experience, managerial skills and knowledge of the Italian market. Typically a company acting as a master franchisee (these are generally not sold to individuals) should be much more sophisticated and better capitalized than the average individual franchisee.
In the selection process of the Italian Master franchisees’ candidates, a crucial role is played by local advisors and brokers. Foreign franchisees will rarely have the necessary resources and knowledge to manage properly this delicate task. Although they might be tempted to accept the first Italian candidate that presents itself for this role, caution and patience is absolutely needed to find out and select the most appropriate candidate.
3.Limiting time and territory
In any Master franchise agreement concerning the Italian territory (or part of it), a sort of trial is often provided, which is also useful to the the franchisor to test the franchise concept in Italy, verify the appropriate adaptations to the local reality and allow the Master franchisee to sign a minimum number of sub-franchise contracts.
This trial may consist of a limited exclusivity period of time (for example one year), with possible later renewal, and/or a limited territory (for example a region such as Lombardia or Lazio, or even a smaller territory such as the Milan or Rome area).
As far as master franchising is concerned, an initial cautious approach is recommended, as it allows franchisors to test their expansion project, thus creating the premises for further expansion.
While it is tempting to choose a single master franchisee for the entire Italian territory, because of the challenges outlined above, sometimes it is better to divide the Italian territory into smaller areas, such as the northern area – which is the richest and therefore often the most attractive for investors – or the central-south area, which is the most populous, thus having several master franchisees instead of one.
Granting the whole Italian territory to one master franchisee may result in strong development in only some parts of Italy, leaving other valuable opportunities unrealized.
4.Failure by Master franchisee to meet the development schedule
The main obligation of a Master franchisee is to promote the franchise concept in Italy, identify and select the sub-franchisees, and signing sub-franchising agreements with them. The franchisor might develop targets by testing the market through an initial direct franchise arrangement. However, that rarely happens; therefore, the franchisor is left to study the market in other ways to determine the unit levels that can and should be attained by the Master franchisee.
This creates a high rate of failure, since many times targets in master franchise arrangements are not met. If the franchisee fails to comply with its development obligations, the whole expansion project in Italy might be at risk.
How to avoid this?
First, careful attention should be kept to set clear growth targets for the Italian master franchisee. This implies a careful analysis of the Italian market and competitors, that should be performed by a serious feasibility analysis.
But even the most appropriate analysis cannot avoid at all failures, especially if the Italian Master franchisee has not been selected properly and/or does not perform well its developing obligations.
In such case, the most severe consequence would be to terminate the Master franchise agreement in its entirety. As a less severe consequence, the franchisee’s development rights may be terminated. The franchisee would continue to service existing sub-franchisees and may be given the right to continue to develop on a right of first refusal basis.
Alternatively, its exclusivity may be terminated, which would allow the master franchisee to continue to develop in competition with the franchisor or another franchisee appointed by the franchisor. The franchisor would not, however, be able to grant exclusive development rights in the territory to the newly appointed franchisee.
The franchisee’s failure to comply with its development obligations could also result in the surrender of part of the territory for which exclusive rights were granted. This would allow the franchisor to develop the territory itself or to enter into a new franchise or other agreement with a different franchisee.
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.