Subfranchisees

Subfranchisees are individuals or entities that operate units of a franchised brand under a sublicensing arrangement authorized by a master franchisee. They hold rights to run a unit within a defined territory but are not direct franchisees of the franchisor.

In a typical structure, the franchisor grants a master franchise to a master franchisee, who in turn licenses subfranchisees through sublicense agreements. Subfranchisees usually pay an initial franchise fee and ongoing royalties to the master franchisee, who may remit a portion to the franchisor. The master franchisee provides training, ongoing support, and access to suppliers, marketing programs, and system standards; subfranchisees must implement the brand’s operations manual and quality controls.

Territorial rights may be exclusive or non-exclusive, depending on the agreement. Subfranchisees operate their units under the brand while complying with branding, product or service standards, pricing guidelines, reporting requirements, and development commitments. Termination or non-renewal of the master franchise or subfranchise agreements can affect subfranchisees’ rights and operations.

Benefits and risks vary by perspective. For the franchisor, subfranchise structures enable rapid market reach with capital-light expansion. For the master franchisee, subfranchisees provide revenue streams from fees and royalties and local market execution. For subfranchisees, the model offers faster access to an established system and support but can involve higher hierarchical fees and dependence on the master franchisee for compliance and supply.

Legal considerations include franchise agreements, disclosure requirements where applicable, and laws governing franchising and sublicensing. Regulatory regimes differ by jurisdiction, affecting contract terms, termination rights, and dispute resolution. Subfranchise arrangements are common in sectors such as food service, hospitality, retail, and education.