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
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
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
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.
© 2010 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached