Master franchising is an arrangement where the “master franchisor” contracts with a “master franchisee” (also known as a subfranchisor), where the master franchisee then acts as a mini-franchisor within a specific geographic territory. The master franchisee finds and recruits franchisees and provides the initial and ongoing training and other support services (site election, supplier assistance, marketing programs, etc.). The master franchisor and master franchisee share the fees paid by the franchisee.
For franchisors hoping to grow their brands rapidly, signing another Franchise Agreement with a potential franchisee and opening another franchised location may be too slow. Or, in some cases, the franchisor would prefer to have another party experienced with franchising to act as the franchisor in the territory (this is common for foreign franchisors entering another country, where the foreign master franchisor will contract with a local master franchisee in that country to act as the franchisor).
In this post, we’re taking a look at one of the most common forms of multi-unit franchising: master franchising. Here’s how it works, why a franchisor might consider it, and why you need an experienced franchise attorney to ensure that this multi-unit arrangement is successful.
How Does a Master Franchise Work?
Multi-Unit vs. Single-Unit Franchising
First, let’s differentiate multi-unit from single-unit franchising. You’re probably fairly familiar with the single-unit franchising process: the franchisor grants a franchisee the rights to use its business’ model, brand, and other associated elements. Each franchisee operates his or her location in compliance with a Franchise Agreement and in accordance with the Brand Standards Manual to guide their daily operations.
In contrast, multi-unit franchising can allow for faster growth. There are three common types of multi-unit arrangements: an Area Development Agreement, an Area Representative Agreement, and a Master Franchise Agreement.
The Master Franchise Agreement
A Master Franchise Agreement grants one franchisee (the master franchisee) the right to develop and open its own locations within a specific geographic area. In addition, this master franchisee is granted the right to find and recruit franchisees (subfranchisees) in the geographic area, and to train and provide other support services to these franchisees. You can think of the master franchisee almost as a mini-franchisor that reports back to the brand owner.
You’re probably wondering how franchise fees shake out in a master franchise system. Typically, the master franchisee collects a significant percentage of the initial franchise fee and ongoing royalties from subfranchisees. The rest goes to the master franchisor. It isn’t uncommon for the master franchisee and the master franchisor to share these fees 50/50, though this can vary significantly depending on the industry, the experience of the parties, and the services being provided by the master franchisee.
This type of arrangement must be offered under a separate Franchise Disclosure Document (FDD), so franchisors who have only engaged in single-unit franchising thus far will need a knowledgeable franchise attorney to draft up an appropriate FDD and any other necessary documents. This means that the master franchisor must offer or sell the master franchise rights to a master franchisee under one form of FDD, and the master franchisee must prepare its own FDD before it can offer or sell subfranchises. The disclosures required in each FDD will typically vary quite a bit, as the rights granted are different and the “franchisor” under each is a different party.
Is a Master Franchise Agreement Right for My Franchise?
If you’re contemplating a multi-unit franchise arrangement for your franchise system, you should seek out qualified legal counsel to help determine which type of multi-unit agreement will work best for your business. That being said, here are a few points to consider as you explore the possibility of master franchising.
A master franchise arrangement is an effective way to expand your brand by, in a sense, outsourcing a significant portion of the work to the master franchisee. In fact, you can penetrate a new market quite quickly by relying on a skilled master franchisee to find, train, and support subfranchisees. The right master franchisee will already have connections in that area and be able to open and operate franchised locations smoothly.
By contracting away the franchisor responsibilities to a master franchisee in a territory, the master franchisor is free to focus on other territories and in supporting the master franchisee.
A master franchise arrangement is particularly helpful to U.S.-based franchisors looking to expand their brands outside of the U.S., or for foreign franchisors looking to expand their brands into the U.S. This type of multi-unit franchising would allow a local master franchisee in another country to recruit his or her own franchisees in that country, and to support these franchisees. So instead of the franchisor having to expend time, effort, and money—key ingredients that are often in short supply—oversees, it can mitigate some of the costs by working with a competent master franchisee already operating in the desired country and that is knowledgeable about local laws and customs.
The Potential Downside
While master franchising can be used to quicken market penetration and grow a brand exponentially, it’s not always the best move. Too much growth too fast can cause a franchise system to become bloated and inefficient, with individual locations failing to meet system standards. Additionally, the wrong master franchisee can do much more damage to a franchise’s workings than one non-compliant franchisee can. Aspiring franchisors may want to start off with a standard franchise before seeking to expand their franchise systems in this way.
A Master Franchise Agreement Tailored to Your Business
Franchising is already a highly regulated industry, and any form of multi-unit franchising can further complicate the regulations by which you must abide. The experienced franchise attorneys at Larkin Hoffman can demystify the process. We’ll work with you to draft a Master Franchise Agreement or any other necessary documentation to fit your business’ unique needs. Contact us today to learn more about our legal services for franchisors.