subfranchises

Subfranchising is a tier of a franchise system in which a franchisor grants rights to a master franchisee to recruit, train, and support subfranchisees within a defined territory. The master franchisee, in turn, becomes the subfranchisor for that region and collects fees, royalties, or both from the subfranchisees, while providing brand standards, operating manuals, marketing, and supply chain support. Subfranchises are common in markets requiring local knowledge, language, and regulatory navigation, and they enable rapid geographic expansion without the franchisor bearing all development costs.

Structure and roles: A typical subfranchising arrangement involves three levels: the franchisor, the master franchisee, and the subfranchisees. The master franchisee may enjoy exclusive rights within the territory and is responsible for local training, site development guidance, and ongoing support to subfranchisees. Subfranchisees operate individual outlets under the brand and system, paying upfront fees and ongoing royalties to the master franchisee, who forwards a portion to the franchisor in some agreements.

Legal framework: Subfranchise arrangements are governed by master franchise agreements and subfranchise agreements that set territory, performance standards, branding, quality control, and termination terms. Contracts address disclosure requirements, training obligations, supplier arrangements, and compliance with local laws. Regulatory regimes vary by jurisdiction, and consumer protection and franchise disclosure rules may apply.

Advantages and risks: For franchisors, subfranchising can accelerate market entry and reduce capital exposure. For subfranchisees, it offers local market expertise and investment opportunities. Risks include loss of direct control, inconsistent brand execution, revenue disputes, and dependence on the master franchisee’s performance.

Examples: In practice, a franchisor may grant a master franchise for a country to a local operator, who then issues multiple subfranchise rights to individual operators, while the franchisor retains ultimate brand oversight.