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Defining Sub-Franchising Once and For All
Defining Sub-Franchising Once and For All
As someone who has been in franchising for 35 years I've seen a number of changes especially in the area of franchise structures. These structures include area developers; master franchisors, regional developers, development agents and the old reliable sub-franchisor (I prefer to use that term with a hyphen) come to mind. Often times these titles are used without regard to their true meaning. Usually it's a prospective franchisee that becomes confused and doesn't fully understand the correct definition until they speak with their franchise attorney.
I hope to put one of the most misunderstood terms to bed once and for all. That term is sub-franchisor and its subset sub-franchisee. According to the FTC the definition of a sub-franchisor is as follows:
A "subfranchisor" is a person "who functions as a franchisor;" by use of the qualifying phrases "grants a franchise" and "participates in the franchise relationship," the amended Rule clarifies that in order to be considered a subfranchisor, a party must have as a franchisor has (1) the authority to enter into a franchise agreement (or another agreement relating to the franchise), and (2) as a result of entering into such an agreement, that party is obligated to perform after the purchase of the franchise is consummated.
Franchisor means any person who grants a franchise and participates in the franchise relationship. Unless otherwise stated, it includes subfranchisors. For purposes of this definition, a "subfranchisor"means a person who functions as a franchisor by engaging in both pre-sale activities and post-sale performance.
The FTC explanation continues in part:
The role of a subfranchisor is materially different from that of a broker, for example, because a broker typically is not a party to the franchise agreement and does not have post-sale contractual obligations to franchisees.
Why is the term so often misunderstood? I believe because people sometimes confuse the contractual obligations an entity has with certain duties they perform. Although an area or regional developer may have certain responsibilities from a franchise sales, training and support standpoint most of these entities are not a party to the franchise agreement. Rather franchisees they recruit and train enter the franchise agreement with the franchisor.
So where does sub-franchising take place? In almost all cases when a franchisor grants licensing rights to someone in another country and that licensee enters into franchise agreements with franchisees in their own country or territory.
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