Master franchising is often considered by foreign franchise systems as the ideal vehicle for bringing their system into Canada and by Canadian franchise systems as the preferred method of expanding their franchise system beyond Canada's borders. Under a master franchise agreement, the master franchisee is granted a large territory (for example, a province or even the entire country) with rights to sub-franchise the system and sell franchises (including sub-licensing the marks to franchisees) within its territory. This differs from the standard franchise relationship in which the franchisor typically directly grants the rights to a franchisee to operate its branded business at a particular location for the term of the franchise agreement.

Here are the top five issues to consider when determining whether master franchising is right for your franchised business:

  1. With master franchising, the franchisor has less day-to-day responsibility for running the system in the territory.
    • A master franchisee, by definition, has the right to sub-franchise within its territory. It is thus typically tasked with dealing with the individual units, so the franchisor has less need to work with the franchisees directly. In addition to saving time and money, this can help a foreign franchisor to potentially avoid directly carrying on business in Canada (and any required compliance with Canadian immigration, taxation or other legal requirements).
    • The franchisor should still supervise the master franchisee and, ideally, make regular visits to individual franchised businesses in the territory, but much of the responsibility for running the system in the territory in question is transferred to the master franchisee.
    • This can result in substantial cost savings to the franchisor.
  2. With less day-to-day responsibility comes less control.
    • The franchisor must be prepared to place a great deal of faith in the master franchisee to properly maintain and develop the franchise system in the territory while, at the same time, protecting and enhancing the franchisor's brand.
  3. With less control comes greater risk.
    • A well-placed master franchisee can open doors in an unfamiliar market and will likely be much better suited to comply with local laws and address local customs and preferences. However, choosing the wrong master franchisee can cause significant harm very quickly, in terms of both operational efficiency and success and the reputation and value of the franchisor's brand.
    • While there is typically no privity of contract between the franchisor and the individual franchisees or their customers, the franchisor will almost always be viewed as another deep pocket that plaintiffs of either group will attempt to target if something goes wrong (and the master franchisor should be fully indemnified by the master franchisee from any costs or damages arising from such claims).
    • The franchisor's brand and reputation may be tarnished by conflicts between the master franchisee and its unit franchisees or between the franchisees and their customers, with respect to which, it might have very limited recourse to address or resolve.
  4. Revenues and Profits: To share or not to share?
    • The franchisor's revenue typically comes from three distinct streams: (1) initial franchise, renewal and transfer fees; (2) periodic royalties typically based on the franchisees' gross sales; and (3) sales of products and supplies to franchisees.
    • By interposing a master franchisee to do most of the work in the territory, the franchisor must expect to share a portion of one or more (and sometimes all) of those revenue streams arising from franchising activities in the territory.
  5. Statutory obligations don't disappear. They just move up a level.
    • While the master franchisee will be required to comply with all applicable franchise legislation relating to individual franchisees (i.e., since the master franchisee is the "franchisor" in that relationship), the master franchisor will still be required to comply with applicable franchise legislation (including disclosure and good faith requirements) opposite the master franchisee.
    • In addition, the franchisor will want to ensure that the master franchisee discharges its disclosure and other legal obligations properly and that the individual franchise agreement is assignable to the franchisor upon termination of the master franchise for any reason, and does not contain any provisions that the franchisor would not be prepared to inherit in the event such an assignment takes place.

Bottom Line: There is almost always a business case for a franchisor to engage a master franchisee in a given territory, as opposed to franchising individual units directly. This is particularly true with a jurisdiction far away from the master franchisor's home territory with laws and customs with which the master franchisor may not be familiar. Interposing a master franchise is not, however, inexpensive or without risk. As with any business relationship, doing your due diligence to find the right partner is typically the first and most critical step. Training and supporting that partner going forward is also of paramount importance to the long term success of your franchise system in a foreign market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.