Master Franchising is the most frequently used method to expand a franchise network in Italy. But many foreign franchisors underestimate the changes in their franchise agreements, documents, manuals and training programs that are needed to adopt this model in Italy. Such adaptation –which is necesssary to ensure success to the franchise and to avoid legal risks – requires,time and costs. Any foreign franchisor willing to elect a master franchising strategy for its expansion in Italy should hire local legal and business consultants, with a significant knowledge and experience in the franchising field to create and adapt the necessary documents, manual and programs.
1.Master franchising: a very common method of expansion, but keep attention to the adaptations needed
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.
But many foreign franchisors underestimate the changes in their franchise agreements, documents, manuals and training programs that are needed to adopt this model in Italy, and the related costs.
Master franchising is premised upon a sharing of the responsibilities for recruiting, training and supporting the sub-franchisees, and upon a sharing of the revenue stream from them. Whereas most franchisors embarking upon international franchising already have development agreements or are fairly conversant with how they work, most novice international franchisors are unfamiliar with the details of what is required to successfully use master franchising as a growth strategy in the Italian market.
Let’s briefly see what adaptations and changes foreign franchisors need to adopt this method of expansion in Italy.
2.What changes to agreements and documents are needed for Master Franchising in Italy?
First of all, foreign franchisors electing to use master franchising will need to prepare both the disclosure document and a master franchise agreement compliant to Italian franchise law, thus modifying their domestic franchise disclosure document and agreement to reflect the required changes. Additionally, they will have to adapt their standard , unit sub- franchise agreement that the master franchisee will have to sign with the Italian sub-franchisees.
This requires, of course, time and costs. Misunderstanding the time and cost required to properly draft the documents that are needed for a Master franchise transaction in Italy can be problematic. Franchisors are tipically in a hurry to have documents available once they have an international prospect, but they are also reluctant to incur the expenses of preparing documents until that point.
A foreign franchisor willing to elect a master franchising strategy for its expansion in Italy will have to prepare both a specific master franchise disclosure document and a specific sub-franchise disclosure document for the master franchisee’s adaptation to the Italian market and use to sell unit franchises.
The disclosure must be drafted in Italian language, according to the Italian franchise law. The master franchise agreement and, above all, the standard sub-franchise agreement need not to be in Italian by Law: however, it is common practice in Italy that also such agreements are drafted in Italian language.
This adaptations should be done by an Italian law firm, with a significant knowledge and expertise in the franchising field. International franchisors will need to invest significant time in making the decisions required to prepare these documents, since they have different requirements from domestic unit franchise agreements.
Since the master franchisee usually fulfills most duties to franchisees that are specified in sub-franchise agreements that the franchisor would fulfill in a direct, domestic agreement, a thorough review and revision of the franchisor’s domestic franchise documents will be required to prepare the documents fit for Italy.
An important issue in structuring a master franchise agreement is the nature and content of the unit sub-franchise agreements to be granted by the master franchisee. When the franchisor uses 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 peculiarity of the Italian market and by local legislation.
The franchisor will want to have continuity and the comfort that comes from requiring the use by the master franchisee of the form of unit agreement used in the franchisor’s home jurisdiction. On the other hand, the master franchisee will want to have some flexibility to adapt the standard agreement for Italian customs, circumstances, and law. The master franchisee may also wish to have some flexibility to vary the standard agreement for special deals and situations.
Ultimately, there has to be a workable balance between the needs of the franchisor and the master franchisee.
3.What changes to operating manuals are needed for Master Franchising in Italy?
Just as all franchisors have developed operations manuals to explain to franchisees and their staffs the procedures for opening and operating a franchised business, franchisors that adopt master franchising as their expansion strategy in Italy should prepare master franchise manuals that explain how master franchisees are to fulfill their duties as master franchisees. This approach is used to create flexibility and confidentiality in operating procedures.
Although franchisors have typically operated multiple outlets before they begin franchising, and can prepare their franchise operations manuals based upon how they have learned to successfully operate their businesses, many franchisors grant their first Italian master franchise agreement having no experience with international master franchising. Thus, they will need to either hire or retain someone locally with the appropriate experience to create the master franchise manual. This is a cost of master franchising that is often overlooked.
The unit franchisees’ operations manuals used by franchisors in their home markets typically require modifications to address different ways of doing business in Italy and to clarify the role of the franchisor and of the master franchisee in supporting the sub-franchisees.
These manuals usually must be translated into Italian, which can be a considerable additional expense. Although master franchise agreements often require master franchisees to adapt manuals to the Italian market and to bear responsibility for translating them, franchisors need at least to approve the adaptations and to check if the translation is true to the franchisor’s intentions.
4.What training programs’ changes are needed when expanding in Italy using Master Franchising?
Training is a core element of every franchising program. Master Franchisees expect to be trained in how to operate the franchised business, or in how to adapt their pre-existing operating procedures to the franchise brand’s policies and procedures.
Most franchisors train the master franchisee in the skills needed to be a franchisor, using a formal classroom training at the franchisor’s headquarters, as well as on-the-job assistance in the master franchisee’s territory. This is an added expense for the franchisor, but it should result in the master franchisee successfully recruiting and establishing sub-franchisees.
When an Italian master franchise is granted, the initial training program and materials usually need to be modified to reflect how business is done in Italy. Much of training related to operating a franchised outlet will be assumed by the master franchisee; the franchisor will want to make sure that the essence of its program is retained by the master franchisee.
An entirely new training program must usually be established to teach a master franchisee how to act as a franchisor in the Italian territory. Franchisors should consider expenses related to creating training materials and manuals, the duration and location of the classroom component of the training, how many of the master franchisee’s team should attend the training, the nature of follow up training in the master franchisee’s territory, and on going training to help master franchisees improve their businesses.
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.