The most common franchise model requires franchisees to pay for the rights to use your intellectual property and to cover the establishment costs to open a new franchise outlet. This is the biggest advantage of franchising as an expansion model as it provides entrepreneurs with the two fundamental requirements to grow their business – capital and people. This allows your brand to capture the market quicker than traditional business models where the owners would be limited in the amount of funding they could acquire to open new locations.
With capital raising being one of the central rationales for choosing franchising, the question is why would you choose an alternative model which includes helping to fund your franchisees start-up costs?
Cost as a barrier to entry
One of the main reasons for providing funding assistance to franchisees is where costs to open a new outlet are so high that it would limit the number of potential good franchisees who would be able to operate your business. This might be there case for businesses like medical-related clinics or motor showrooms where the initial investments could be significant.
There are a few models which can help to address this issue:
- The Joint Venture model
Here the franchisor and franchisee each invests a percentage of funds, goods or fit out equal to their designated share as joint shareholders of the business. The split could be 50/50 or any other percentage depending on their shareholders agreement.
The franchisee will often run the day to day of the business while the franchisor will act more like a silent partner. However the roles and responsibilities could vary depending on the type of agreement entered into. This of course means that the franchisor has more at stake in the profits of the business and may wish to take on more of a management roll within the new outlet.
- Joint Venture with equity buy-out model
Similar to the previous model, the two parties set up the business together, however this model allows the franchisee to buy out the franchisor over time, eventually owning 100 percent of the business.
The advantages here is that the franchisor doesn’t have to have such a hands on roll in too many of their new outlets and the franchisee is incentivised to increase the profits of the business to quickly buy out their partner.
- Joint Venture guarantee model
In this case the franchisor provides all the funds to establish the new outlet and partners with the franchisee to operate the business in a shareholding partnership. The franchisee in this case may or may not have a buy-out option.
The key here is that the franchisor provides the strong supporting guarantee for loan funding and the joint-venture is responsible for the loan repayment.
To Sum up
Be careful which franchise financing model you choose as each can be complex to manage and time consuming. Each option can provide both greater risk and reward to franchisors beyond the traditional business model. For business owners looking to maintain greater control of the operations of their franchisees, this can be done just as easily with a well drafted franchisee agreement and operations manual.
If you have any enquiries or need assistance franchising your business, get in touch with our commercial lawyers by completing the form on this page, or calling us on 1300 337 997.