The world of franchising has become layered with complexity. In every franchise system there is always a franchisor that grants the license and owns the trademark. There is always a franchisee that uses the trademark and operates the franchise location or unit. But there may be many layers in between. There could be subfranchises, area developers, and representatives.
What is a Subfranchise? What is an Area Developer? What is an Area Representative? How are they the same? How are they different? The 3 concepts are somewhat fungible and there is much confusion about the overlap and the differences. Recognizing this, the Franchise and Business Opportunity Project of the North American Security Administrators Association, Inc. [NASAA] post consultation with the Federal Trade Commission [FTC] has published Multi-Unit Commentary [“Commentary”] for public comment.
In the words of the Commentary:
These structures [Area Developer, Subfranchise, and Area Representative] are not mutually exclusive; that is, a franchisor may use just 1 structure or may use a combination of 2 or 3 structures. There are no universally accepted terms for these structures within the franchise industry. The terms used to describe the structures in different franchise systems, and in different laws and regulations, vary widely.
Previously on our blog we discussed Area Developers. Click here to see our post on Area Developers.
Today we are going to discuss Subfranchises. The Commentary defines Subfranchisor as: a person [or entity] that is granted, for consideration paid to the franchisor, the right to grant unit franchises to third parties, generally within a delineated geographic area. So in essence, within a defined geographic area, the Subfranchisor steps in the shoes of the franchisor. The Subfranchisor is given some portion of the initial franchise and royalty fee paid by the franchisee. The franchisee, under the subfranchisee model, is referred to as the Subfranchisee.
Now, you may be saying: ‘I have never heard the word Subfranchisor.’ You are not alone. This term is rarely used in the industry. Subfranchisees are typically referred to as master franchisees or regional franchisors.
This is the graphic depiction provided in the Commentary:
So how disclosure issues handled under a subfranchising relationship? Take a listen.
Again, let’s keep things in prospective. The Commentary has not been adopted. It is only being published for public comment. The Commentary may change, be modified, or redrafted after public comment. The Commentary is not intended to override Federal Franchise Disclosure Laws.
Look for our Post on Area Representatives.