If you want to expand your business, franchising is an excellent option. However, you will need to consider the most suitable franchising model for your business. There are several models you can use, including:
- ‘traditional’ franchising;
- joint venture franchising; or
- a partnership.
This article discusses the differences between these franchising models to help you decide how to expand your business.
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Traditional Franchising Model
In this model, the franchisor’s entity (typically a company) and the franchisee entity (either a company or an individual/sole trader) enter into a franchise agreement. In this case, the franchisor grants the franchisee the right to use its intellectual property (IP) and systems when running the franchised business.
Furthermore, the franchisor is not directly interested in the franchisee’s business by being a shareholder. Instead, the franchisee runs the business as an independent company. This franchising model is straightforward, as you only need to rely on the terms of the franchise agreement to exert control of the franchisee and its business.
The table below outlines some additional advantages and disadvantages of the traditional franchising model.
What Are the Pros and Cons of the Traditional Franchising Model?
| Pros | Cons |
| The model limits financial risk for Franchisors as the franchisee solely operates the franchised business and is, therefore, liable for the business’s debts. | There is a higher finance barrier for Franchisees to enter the franchise network, although this can lessen if a Franchisor provides finance to incoming Franchisees. |
| The Franchisor-Franchisee arrangement is not governed by the Corporations Act 2001 (Cth), keeping the contractual relationship between the parties limited to the franchise agreement and any premises-related documentation. | Some franchisors can miss out on good talent because of these financial barriers. |
| Franchisors benefit from the franchisee’s network growth without having a direct financial interest in each franchised business. | Franchisors must rely on the terms of the franchise agreement to assert their rights as franchisors or to bring franchisees into compliance, where they have no actual ‘control’ over a relevant franchisee entity. |
| The franchisor and franchisee are kept separate for taxation purposes, and tax planning and outcomes will depend on the structure of each party. |
Joint Venture Franchising Model
In this model, the franchisee is a company. Further, the franchisor (or its corporate associate) and the ‘franchisee’ hold shares in the business. That franchisee entity will still be subject to a franchise agreement in the usual sense. In addition, however, both parties must enter an additional shareholders or joint venture agreement. This agreement will set out how tasks and responsibilities will be divided amongst the shareholders.
What is an Operative Shareholder?
Usually, a joint venture agreement will nominate one party to carry out the franchise agreement and ensure compliance with the practical operative terms. This party becomes the ‘operative shareholder’.
Under this agreement, the franchisor can exert some control over the franchisee as a shareholder or director. This control may extend to the following areas:
- recruitment and employment;
- business planning; and
- site selection.
What is a Corporate Joint Venture Franchise?
In a corporate joint venture franchise, the franchisor will incorporate a related entity to become a shareholder in each company. The prospective operator (or its company) will also hold shares in the joint venture company. In this case, the joint venture company becomes the franchisee under the franchise agreement with the franchisor.
You can choose to set up various shareholding structures within the shareholder agreement. This might include:
- different percentages of shareholding;
- different types of shares issued; and
- even various rights attached to each share or share type.
The franchisor’s related entity and the prospect typically make joint decisions concerning the joint venture company and divide income from the joint venture company based on their apportioned shareholding. Alternatively, the shareholder’s agreement may entitle a party to:
- take an income from the business or another form of distribution before payment of any dividends; or
- entitle only the operative shareholder to receive dividends, with the ‘franchisor’ shareholder only entitled to a distribution when the company is sold or wound up.
What Are the Pros and Cons of the Joint Venture Franchising Model?
| Advantages | Disadvantages |
| Prospective franchisees still feel a sense of ownership in the business whilst having less control. | More control by the franchisor may prevent the franchisor from being deemed a large proprietary company. |
| The franchisor’s liability is limited by (typically) creating a separate legal entity where shares can quickly transfer. | The relationship between the parties will be governed by the Corporations Act 2001 (Cth). |
| There is flexibility for the parties to contribute capital and, in return, receive equity equal to their contribution. | The franchisor’s representative may be a director, in which case they must abide by the statutory director’s duties as set out in the Corporations Act 2001 (Cth). |
| Franchisors have additional control over the operation of the business on a franchisee level. | Extra documentation is required for the offer, and there are more hurdles from a transactional perspective when a party wants to exit the franchise. |
| Prospects may need help understanding the documentation and relationship between the parties. | |
| There are administrative and taxation considerations for both parties, but especially the franchisor. For example, the joint venture company will not form part of the franchisor’s consolidated group for taxation purposes. |
Key Takeaways
When deciding how to expand your business, consider the various franchising models and their benefits. For instance, a traditional franchise model involves parties governed by a franchise agreement. In this case, the Franchisors and Franchisees are kept separate for taxation purposes. However, a traditional franchise model’s financial barriers can deter prospective Franchisees.
Alternatively, a joint venture franchising model involves a relationship governed by the Corporations Act 2001 (Cth). The franchisor’s liability is also limited by creating a separate entity. However, it would help if you kept in mind the extra administrative and taxation considerations that can confuse parties. This includes additional documentation that you will need to keep on top of.
If you need assistance understanding the franchising options available, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Usually, a joint venture agreement will nominate one party to carry out the franchise agreement and ensure compliance with the practical operative terms. This party becomes the ‘operative shareholder’. The operative shareholder may be one of the existing shareholders or their chosen representatives.
Under a traditional franchise model, the franchisor is not directly interested in the franchisee’s business by being a shareholder. Rather, the franchisee runs the business as an independent company. However, under a joint venture franchising model, the franchisor and franchisee hold shares in the business.
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