Hamilton Pratt

Master franchise and master development agreement

In those territories which contain a substantial risk for franchisors, most franchisors seek to pass on this risk to a master franchisee or developer. In such situations it is the master developer/franchisee who funds the overseas expansion and who provides the management and other resources in order to develop the operation. As already indicated there are substantial differences between master franchise and master development agreements but, generally, the issues surrounding the two are similar. Usually, however a master developer is approached by a business with substantial resources to enable that business to fund the development itself and not through the resources of franchisees and third parties.

The major advantage of master franchise/development agreements are, as already indicated, that a franchisor can make use of the knowledge and finances of the developer and franchisee but the disadvantages are considerable. These are:-

Control is lost. The master developer/ franchisee is granted rights, almost always exclusive, for a considerable period of time – usually 20 years. Whilst the “master” agreement contains obligations on the master franchisee/developer, in practice relatively few master agreements are terminated for breach.

Termination. If a franchisor has to terminate a master agreement the consequences can be severe because that franchisor has up until then had little contact with the target country and may be unable to take over the franchise outlet.

Profitability. The profitability of a “master” arrangement is less than direct franchising because clearly the master developer/franchisee must obtain a return for its investment.

Risk. There is the danger that a franchisors “eggs are in one basket”. If either the master franchisee or developer fail to live up to their commitments, this could have a very substantial knock on effect on the franchisor’s ability successfully to expand in that country.

Not franchising. In the case of master development agreements (but not master franchise agreements), a developer undertakes to open outlets itself using its own employees. Such an arrangement is not franchising and the advantages of franchising set out above will not be available.