What is a master franchise?

There are many ways that a franchisor can expand overseas.  Traditionally one of the favourite ways is to appoint a master franchisee who becomes, in effect, the franchisor in the overseas territory.  This is a good arrangement where the franchisor does not have the management resources or indeed the knowledge of the relevant market and wants to make use of local input.  The master franchisee will have to enter into a detailed master franchise agreement which sets out precisely what it is required to do and what the franchisor has to do.  There is an initial payment to the franchisor – negotiating master franchise terms can be time consuming and expensive especially as very often input has to be obtained from lawyers in different jurisdictions and translations obtained – to reimburse the franchisor’s costs.

The master franchisee may be given the right to open its own outlets but the general thrust of the arrangement is that the master franchisee will look for sub franchisees with whom it will enter into franchise agreements.  The terms of those franchise agreements must be approved by the franchisor and the franchisor will receive a percentage of the continuing fees payable to the master franchisee. 

The real draw back with master franchising is that the franchisor does not generally have a direct contractual link with the sub franchisees and, accordingly, there is a loss of control. This does mean that master franchising is particularly suited to businesses which are relatively simple and where maintaining high standards across a number of areas is not essential so master franchising may be less suited to, for instance, restaurants or domiciliary care businesses.