Sub-Franchising

Abstract

Sub-franchising is a variation of the classic relationship between a franchisor and franchisees. A franchisor contracts with a sub-franchisor to expand the franchisor's system in a given territory. The sub-franchisor pays a stated royalty to the franchisor for the right to use its trademarks, proprietary products, and business systems in selling franchises. The subfranchisor then performs all the functions of the franchisor in its territory. This allows the franchisor to expand more rapidly than it could do singlehandedly. However, the franchisor may lose control of its system, because the sub-franchisors are responsible for monitoring and servicing franchisees. Chains using sub-franchising tend to be smaller than those that do not. Systems using sub-franchisors have lower initial royalties than chains using only direct franchising, but subsequent royalties are often higher.