Joint Venture Franchises: The Whys And Wherefores

Franchising provides a flexible model for growth or re-engineering, with a variety of structures to meet different needs. Of all the structures the joint venture franchise is the least understood and most likely to cause difficulties, if not structured correctly. In order to understand why this is so, it is necessary to consider the rationale for using the joint venture model and the manner in which the relationship should be structured.

1. What is a joint venture franchise?

   From the outset, the name itself is misleading. It implies that the joint venture and franchise are one and the same, often documented within one legal contract - a joint venture franchise agreement. That perception is the root cause of many problems encountered with this model. A "joint venture franchise" is shorthand for the grant of a franchise to a joint venture party.

2. Why would a Franchisor adopt a joint venture model?

   There are many reasons why a franchisor might consider adopting a joint venture structure but they often involve two, diametrically opposed, objectives. Either the franchisor wishes to exert greater control over the franchisee or it wishes to show greater commitment to the franchisee, by committing its own resources to the franchise.

   The controlling franchisor

   In a traditional franchise model the franchisor relies on the contractual terms within the franchise agreement to control the franchisee. This control often extends beyond the manner in which the franchisee operates the franchise business and touches upon the franchisee's access to working capital, the identity of directors/shareholders and their other business interests and typically creates consequences if there is an unapproved transfer of shares in the franchisee. This level of control is often sufficient for franchisors, representing the right spot on the risk/reward graph.

   However, for some franchisors this contractual control is not enough and they want the added influence provided by a joint venture. With a joint venture franchise the franchisor maintains its contractual control through the terms of the franchise agreement but this is underpinned by a further layer of control at a corporate level, through the joint venture or shareholder arrangement. By taking an equity interest in and possibly a seat on the board of the franchisee company the franchisor can influence, and potentially direct, the conduct of the franchisee business. This influence can extend to all aspects of the franchisee's internal operations...