Blog

Businessman planning out his franchises

The Basics of Sub-Franchising

Category: Business

Owning a franchise indeed has many advantages. You get practically all the support and assistance you need from the franchisor and co-franchisees. Building a ready-made business becomes an easier task on your part as a new sole proprietor. But there is one thing that even sets a franchise model from all other business types. This is the opportunity of sub-franchising. You can create sub-franchises through a grant made by the franchisor.

Sub-Franchising Defined

The franchisor may grant a franchisee to create sub-franchises within a defined area. This franchisee is called the “master franchisee,” while the new franchisees created are the “sub-franchisees.” The stipulations for this agreement are defined under the master franchise agreement. The same terms covered in the franchisor’s standard franchise agreement will work under the sub-franchise agreement, although the agreement is made between the master franchisee and the sub-franchisee.

In choosing the master franchisee, the franchisor keeps the sole power to decide over the future of the franchise via regional or international expansion. Typically, sub-franchising is used to reach new markets. The franchisor will no longer be able to assist these units the way he would have wanted it with domestic or local franchises; hence, there is a need for sub-franchising agreements. There are no rules in dividing up geographical areas in franchising. The master franchisee will serve the sub-franchises in these regions, providing all the support they need as if he is the franchisor for the region. The master franchisee will get a portion of the franchise fees as well as royalties that were collected as per the franchise agreement.

Merits and Challenges Under Sub-Franchising

Man pointing at his international franchiseSub-franchising offers a clear benefit of faster growth. Although the same aspect of growth patterns and behavior is observed as a standard franchise, the very source of quicker development for a sub-franchise is the more local setup, which allows the master franchisee to understand the local market better. As such, local knowledge is more defined and easily tapped into. More so, due to the closer geographical distance between and among master franchisee and sub-franchisees, logistical support is way better.

Challenges, however, do occur with this type of agreement. One is cost. New administrative and legal costs are incurred within a master franchise network. Franchise disclosure documents (FDDs) are separate, which may differ depending on the master franchisee’s needs. Another issue could be the weakening of the standards within the system. A number of master franchisees’ objectives may vary or diverge from a single franchisor’s vision over a franchise system. Also, the way cash flow is divided in the system will also differ, affecting the entire franchise value.

Opening new franchises within an area that is largely untapped or have a good future for business is what franchising is all about. The sub-franchising model is one way to uphold this, and it comes with a more local focus. This is beneficial to the franchisor and its franchisees in general as it does not only develop local markets but also widens its market reach.