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Defining Sub-Franchising Once and For All

by Ed Teixeira

Sub-franchising is often a misunderstood term and is frequently confused with other franchise structures. This article puts any confusion to bed by providing the true meaning of the term.

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.

I hope this clears this one up once and for.