What’s a master franchise?

John Pratt writes:

There are many ways 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.

The master franchisee will have to enter into a detailed master franchise agreement, which sets out precisely what they are required to do and what the franchisor has to do. There is an initial payment to the franchisor 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 these must be approved by the franchisor and the franchisor will receive a percentage of the continuing fees payable to the master franchisee.

The drawback with master franchising is that the franchisor does not generally have a direct contractual link with the sub franchisees and, accordingly, there’s a loss of control. This means master franchising is particularly suited to businesses that are relatively simple. So master franchising may be less suited to, for instance, restaurants or domiciliary care businesses.

John Pratt is senior partner at specialist franchise firm Hamilton Pratt and has advised franchisors for over 25 years.