I hear the term “affiliate” a lot. What does that mean and how does it relate to franchising?
“Affiliate” means under common ownership or control.
Let’s say you have a successful flagship company store, Bob’s Subs, LLC. And Bob’s Subs, LLC has operated for 5 years very successfully. You now want to franchise it. We do NOT recommend that you franchise under Bob’s Subs, LLC. Instead, we recommend that you set up an affiliate called “Bob’s Subs Franchising, LLC.” So Bob’s Subs Franchising, LLC would be under common ownership or control as Bob’s Subs, LLC.
We recommend that you set up an affiliated franchising entity for two reasons: First, this way, liability within the company store LLC and within the franchising LLC will normally be contained. So if there are many claims under one LLC it would not normally impact the other LLC.
In addition, a franchisor will need at some point, depending upon which states it is going into, audited financial statements. We do not want an audit of many transactions at Bob’s Subs, LLC, as that will take a lot of time and cost a lot of money. Instead, we want you to make an opening deposit into a bank account of Bob’s Subs Franchising, LLC and have that audited. An audit of a single transaction will be quick and inexpensive.