Chambers & Co

Purchasing a master licence

A 'master licence' is usually gives you the right to operate in your own country a franchise concept from an overseas licensor. Most of the advice here refers to master licences, but will usually apply to area licences or single territories as well.
It is assumed that you are based in the UK, which has no specific franchise disclosure laws.

Many franchisors will offer what appears to be a set package for a country, but much may actually be up for negotiation, such as the structure, the fees and the levels of support.

Too often lawyers, such as ourselves, are only involved when you are down to the final details of documentation. Unless you are familiar with this type of licence, there is much that we can do to help if we are involved earlier. Here are some things you need to look at before you get to the detail of agreements.

• Do as much diligence as you can on the franchisor. Find out, for example, what experience they have in granting master licences in other countries. If this is their first time, be aware that you will be a guinea pig - and the fees that you pay should reflect the risk involved.
• If the franchisor is from a country that has specific franchise disclosure laws, ask for a copy of their domestic disclosure documents. In America this is called a UFOC or FDD, and in Australia it is the disclosure document required under the Franchising Code of Conduct.
• Most master licence agreements deal very briefly with the level of initial and ongoing support that would be offered. It is vital that you go into great detail about what will be offered and that such commitments are written into the master agreement.
• It sounds obvious, but look at the initial fees and the royalties that are required. Do your own business plan to check whether the projected revenues and payments to the franchisor will leave you with enough profit.
• Be prepared to negotiate initial fees and ongoing royalties. These are rarely cast in tablets of stone. In particular, a large initial fee can often be paid over a period of time.
• Again it sounds obvious but check out the viability of the concept, particularly if it is new to your own country. If the product or service is new to the UK, this should be reflected in the fee structure so that, for example, you pay a lower initial fee, but perhaps a higher royalty.
• You should also check any new product or service, particularly from outside the EC, to see whether it will fit within the existing UK regulatory regime. Any differences, no matter how small, should be taken seriously as bureaucracy can often amplify these differences to the point where you may find yourself reinventing an existing product range to be UK compliant.
• If changes are required for the UK market, it needs to be clear whether ownership of that particular piece of intellectual property is to be shared with the franchisor, or even retained by you. More importantly who pays for, and who is responsible for, satisfactory adaptation?
• Make sure the prices of any products that you will have to buy from the franchisor are agreed and somehow embodied in the master licence agreement.
• Check and confirm that the franchisor has a protectable trademark. If the trademark is owned by someone other than the franchisor - ask why.
• Look at the structure both of the franchisor and how you will operate the business in your own country. If you have an existing business will you operate the franchise through it or will you have to set up a separate company? Will that new company be a subsidiary of or a sister company of your existing business? If you are going to operate a pilot franchise most master licences will require that this be operated through a subsidiary of the master licensee company.

All these points affect the viability of the concept and should be tested before you get to the detail of agreement. We are frequently consulted on these first steps and other important legal considerations such as exit routes. It is much easier to clarify and negotiate any of these points before you are presented with a master licence agreement.