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.
A Primer on Cooperative Advertising and Outdoor Ads
Larger parties (e.g manufacturers, brands, and franchisors) typically covers the lion’s share of an ad’s cost via reimbursement or in trade. This makes local advertising affordable for your business, while simultaneously lowering out-of-pocket and inventory costs.
Searching for the Best Franchises for Minorities
Many franchises incentivize minorities to join their systems. As president of the World Franchising Network Rob Bond puts it, these franchises "grease the skids" on behalf of minority candidates because they see value in promoting diversity among their franchisees. On account of a still-languid economy, however, many franchisors' approach has changed significantly in recent years. As Bond explains, “African Americans and Hispanics were being aggressively recruited five years ago to fill vacancies.” But today most franchisors are more concerned with trying to grease the skids for foreign investors with significant piles of investment capital.
The Financially Distressed Franchisee
In dealing with an individual distressed franchisee, the following questions need to be asked: