A master franchise relationship can look very similar to a multi-unit development structure but has one significant difference. Under a master franchise agreement, in addition to having the right and obligation to open and operate a number of locations in a defined area, the master franchisee also has the right and the obligation to offer and sell franchises to other people looking to become franchisees of the system. The master franchisee becomes the franchisor in their market area.
The master franchisee will generally be required to own and operate at least one or two locations themselves but may be allowed to sell those units to new franchisees at some point in time if they choose to do so.
When a master franchisee signs the master franchise agreement, they generally pay a master franchise fee to the franchisor and then collect a unit franchise fee from each franchise recruited into their system. The royalty they collect, and the unit franchise fees they charge are typically shared with the franchisor; the percentage may vary.
Of all the types of franchising relationships, the master franchise relationship is the most complex, because of the agreement, and the terms of the agreement that generally have some shared responsibilities in support of the unit franchisee.
Each master franchisee will be required to prepare their own Franchise Disclosure Document, and if they are in a country that requires registration or filing, meet those requirements as well.
Master franchising is still the most prevalent method used by franchisors entering other countries.