What is a master franchise and how does it work?

Understanding the difference between a master franchise and a standard franchise is key for anyone exploring franchising.

What are master franchises and why do franchisors use them?

Master franchises allow franchisors to expand without directly operating in every market. John Pratt, senior partner at specialist law firm Hamilton Pratt, explains: “Very often franchisors do not have the resources or market knowledge to expand themselves.

“Therefore, they look for a business that, with suitable training, back-up, marketing and so on, can act as the franchisor in a foreign country.”

Shelley Nadler, legal director at Bird & Bird, adds that master franchisees also provide the financial backing to grow the system: “The master franchisee provides the financial resources to establish and exploit the system in the target country or region. Meanwhile, sub-franchisees provide the financial resources for the outlets they operate.”

This structure benefits both parties – the franchisor gains international reach with minimal direct oversight, while the master franchisee can profit from both operating their own outlets and sub-franchising to others.

Shelley Nadler summarises it like this: “The master franchisee stands in the shoes of the franchisor in the territory. To all intents and purposes, they are the franchisor of the system in that territory. It means the franchisor only has to deal with one entity in the target country or region.”

John Pratt adds that domestic use of master franchises is uncommon in the UK: “Unlike the US and Australia, where such regional masters are common, the UK is really too small for this type of arrangement to work.”

What’s a sub-franchisee?

Brian Duckett, former chairman of The Franchising Centre, explains that a sub-franchisee is “the individual or company that owns and operates the trading outlets that report to the master franchisee in a given country or territory.

“Their reporting responsibility, and their legal agreement, will normally be with the master franchisee, not the franchisor.

“In effect, a master franchisee becomes the franchisor for their territory. They are responsible for recruiting and training their own franchisees. In what you call a ‘normal’ franchise, the franchisee simply runs the outlet delivering the product or service.”

Shelley Nadler adds, “The fee income generated by sub-franchisees is divided between franchisor and master franchisee. The master franchisee will charge franchise fees to its sub-franchisees and from these will not only have to finance its own operations, but also make a payment to the franchisor.”

Does a master franchise mean exclusive rights?

A common misconception is that a master franchise automatically grants exclusivity over a country or region.

Vicky Wilkes, head of legal at Aston Villa Football Club, clarifies: “There is no legal requirement that a master franchise agreement (MFA) should provide the master franchisee with an exclusive right to operate a franchise and appoint franchisees in its territory.”

Exclusivity is often tied to performance. Wilkes explains: “If the master franchisee fails to meet the requisite development targets, rather than the franchisor simply terminating the MFA, the master franchisee may lose its exclusivity.”

Can I purchase more than one franchise territory?

For franchisees operating in territorial systems, expansion may be possible. John Pratt notes: “It is, of course, possible to acquire more than one territory if the franchisor is prepared to allow you to do this.”

However, franchisors typically require proven success in the first territory before granting additional ones.

There are risks to managing multiple territories. Pratt warns: “Franchisees who take multiple territories do need to be aware that it is likely that the franchisor would be able to terminate all franchise territories if there is a breach in one.”

By knowing how master franchises operate, you can make smarter decisions when evaluating new franchise opportunities.