What’s different about a master franchise agreement?

Inside Franchise Business: have you considered master franchisees?So, you’re considering appointing a master franchisee for your business. You might be looking to expand overseas, or simply don’t have the resources to expand your business across Australia.

Master franchising is a great option to bring someone else on board to help you grow your franchise system in a particular area – but what’s the difference between that and a normal franchise arrangement?

What is a master franchisee?

A master franchisee is essentially a sub-franchisor with responsibility for a designated geographical territory.

The Franchising Code of Conduct defines a master franchise as:

a franchise in which the franchisor grants to a [master franchisee] the right:

(a) to grant a subfranchise; or

(b) to participate in a subfranchise.

This means there would be three tiers to your franchise system:

Inside Franchise Business: master franchisee structure

The master franchise agreement

A master franchisee will usually have greater rights than an ordinary franchisee by virtue of the fact that they can on-licence your brand to sub-franchisees. As a result of this, a master franchise agreement needs to deal carefully with a master franchisee’s rights in relation to your intellectual property, as well as the following:

  • Approval by you of sub-franchisees
  • An outline of your supply arrangements
  • Development criteria
  • The form of sub-franchise agreement to be used
  • Training of sub-franchisees

As the master franchisee is growing your system and dealing directly with sub-franchisees, they are also entitled to obtain a share of the royalties paid by sub-franchisees.Usually, sub-franchisees will pay royalties directly to the master franchisee, who will then remit a portion of these royalties back to you.

The Franchising Code

If you’re looking to appoint a master franchisee in Australia, the master franchise agreement will be governed by the Code.

This means that the master franchisee is effectively treated as a ‘franchisor’ under the Code and must comply with all the requirements imposed on franchisors by the Code. This includes requirements to:

  • provide a disclosure document and update this each year
  • allow a 14 day disclosure period when issuing documents to sub-franchisees
  • provide financial information to sub-franchisees
  • provide marketing fund financial statements to sub-franchisees

In addition, master franchisees must disclose key terms of the master franchise agreement in their disclosure document, including your details as the head franchisor.

An overseas master franchisee

Master franchising is a great option for franchisors looking to expand overseas, as it means you can develop the system elsewhere without losing sight of your local franchise network. However, the master franchise agreement needs to have strict quality control measures given the physical distance.

In addition to the clauses referred to above, a master franchise agreement in an overseas territory will also need to deal with:

  • compliance with local laws
  • location of training for both the master franchisee and sub-franchisees
  • location and frequency of meetings between you and the master franchisee, and how these meetings will take place (for example, do they need to be in person, or will a video conference be okay?)

It is always best to have your master franchise agreement prepared or reviewed by a local lawyer, as they will have an understanding of the commercial environment in that territory or of any applicable franchising laws.

Seek advice about master franchisees

If you’re looking to expand your franchise, a master franchising arrangement could be a viable part of your growth strategy. It’s important to do the legwork before venturing into master franchising and seek the advice of a specialist franchising lawyer. Your franchising lawyer will guide you through the master franchising process and advise you on the terms needed in your master franchise agreement.