Can not for profits become franchisors?

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Can not for profits become franchisors?

July 26, 2022         Raphaella Revis

A not for profit organisation may consider operating under the franchising business model, but the question is can they become franchisors?

What is a not for profit organisation?

A not for profit organisation (NFT) is different from typical organisations in that profit is not made. The focus of a NFP is on social and community benefit/change rather than personal gain. It is similar to a charitable organisation, but they differ because of their taxation status.

What is a franchise?
A franchise is a business that operates under the name and purpose of another, and requires a franchising agreement. It is a way for the overarching company to reach more customers, such as the KFC chains which mostly operate as franchises. For more information on what is a franchise please visit our other article: https://openlegal.com.au/what-is-franchising/

Do I need to be for-profit for franchising?
While the majority of well-known franchises appear to be for-profit at first glance, there is no requirement for organisations to operate in this way to be franchisors. The only difference is that the purpose of franchising changes; instead of becoming a franchisor to gain more profit, you can do so to reach more social impact. This is referred to as social franchising. 

Social Franchising: What is it & how will it benefit me?
Social franchising means applying the business principle of franchising to an organisation focusing on societal benefit instead of profit or monetary gain. It is important to differentiate between a franchise providing social benefit and one operating solely for this reason without earning any profit.

This does not mean that your organisation cannot make profit at all; if profit is earned, it merely means that it cannot be distributed to shareholders as earnings, but redistributed within the company. 

The benefits of a social franchise are;

It allows your organisation to reach more customers, maximising social impact as…

  • The organisation can operate globally
  • The scale of business is larger 
  • Empowers others to be part of the initiative
  • Working with the organisation’s mission 

Socially-Developed vs Socially-Acquired Franchises  

Social franchises can be divided into multiple different models and approaches. Generally speaking, the two most common are either socially-developed or acquired.

Socially-developed

  • The not for profit organisation becomes a franchisor in order to reach more impact either in terms of members working on the common cause (employment) or have a more substantial client basis.
  • The organisation would operate independently of other commercial franchises. The advantage of this model is that it can operate as more niche and specialised, attracting more clients. While this is beneficial, it may also be disadvantageous to not operate under a commercial franchise because such an organisation can lack the necessary internal operations that are established commercially. 

Socially-Acquired

  • The not for profit organisation acquires a commercial business which then becomes a franchise. This commercial business might earn a profit during its operations, but the profit is used to sustain the social impact that the NFP is dedicated to.
  • The advantage of this model is that the NFP can sustain its operations by utilising a commercial change for their not for profit missions. The disadvantages of this model include the difficulty in acquiring itself, as it may be difficult to convince commercial owners to sell to an organisation not geared towards making money. Another disadvantage can also be the public perception, as it might not be clear to customers why a NFP has franchised a commercial, profit-earning business. 

What’s Next?

Becoming a franchisor can positively benefit a not for profit organisation by allowing them to branch out and reach more people for social benefit. It is important to determine which type of model is best suited to your business and that you fully understand the differences between socially-acquired and socially-developed as they can be technical. For more information or assistance, get in touch with our team via the contact form or by calling 1300 337 997.

About Raphaella Revis

Raphaella RevisRaphaella is a legal intern at OpenLegal and is currently a second year student studying Bachelor of Law and Science in Information Technology at UTS. Her interests are legal tech, contracts and IP.