What is Subfranchising?
Franchisors may at times grant the right to exercise powers, normally reserved for them, to a franchisee in a specific territory. These entities are called “subfranchisors”. They are charged a separate initial fee during the start-up phase for the right of the subfranchisor to exercise the powers in their area. The rights offered in subfranchising include:
- The right to offer and sell franchises
- The right to collect fees and royalties
- The right to provide training services and support to franchisees within their designated boundaries
Like the franchisor, the subfranchisor signs a subfranchising agreement with the franchisees (when a franchise is sold) in the area. Technically, the subfranchisor takes over the role of the franchisor in certain geographic regions.
The subfranchisor often has to split the fees and royalties which are collected in his domain between himself and the franchise system, but in some cases they may retain a majority of the fees while simply forwarding a certain percentage upwards. The subfranchising agreement usually dictates the amount of the franchise fee and royalty to be received, so even though it may appear as highly lucrative arrangement for the subfranchisor, we have to realize that they have to first spend heavily to sign up a subfranchisee in their territories.
There is no specific amount of units that a subfranchisor may operate, it all depends on the agreement that they have with the franchisor. The franchisor may also revise the quota if the subfranchisor can successfully meet and operate the number of franchises decided upon in the franchise agreement. The expansion objectives may be measured in franchise agreements executed, units open and operating or units “under construction”. The subfranchisor can open their own units in their region but can also license other franchisees in their region in the time allotted to them in the agreement.
One must make sure whether subfranchising is being offered by certain franchises, since not every franchise system offers such agreements. This may be due to the organization disliking the loss of power associated with subfranchising. The subfranchisors can exert greater power on the franchise than individual franchise units since they have more units working under them and are a larger source of revenue for the system.
Subfranchisors also don’t have such an easy arrangement as it appears to be. They run a substantial financial risk as the investment required to purchase a territory can be very large. Also, subfranchisors are responsible for the leasing arrangements of franchisees in their area and they may face litigation from future disgruntled franchisees.
Yet these risks are calculated and overlooked if the subfranchisor focuses on the greater rewards in the long run. They will benefit from sharing the initial fee for each new franchisee and the on-going royalty payments made by the franchisees operating in their geographic region. These royalty payments may last for even 20 years and more.
How Do You Pay for a Franchise?
Whether you’re purchasing a whopper from Burger King or joining the Burger King franchise system, the old mantra holds true: there’s no such thing as a free lunch. When you first get started running a franchise you need to pay a fee to allow you to enter into that franchise. These fees are the largest fees that you will normally pay a franchisor and typically range between $5,000 and $1,000,000 depending on the franchise. The franchisor charges this fee as a way to recoup the costs of expanding the franchise and to continue to grow. From a franchisee perspective, this is a major outlay and can take a long time to make back, but is a necessary step. Aspiring business owners must understand how much capital is available to them so they can ascertain how much they can afford. The cash you have at your disposal is known as liquidity, and there are numerous ways to increase your liquidity above the balance in your bank account. As a result, many people don’t realize how much capital they actually can use for investments, like launching a franchise branch. We’ll run through some of those methods below.
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New Government Data Will Measure the Economic Impact of Franchising
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