Franchise Advice
Collaboration is critical to the success of any individual franchised business and therefore to the success of the franchisor’s network. History has proven that the most successful and durable franchises are those where the level of support provided by the franchisor matches the individual eff orts of each franchisee. However, there are other ways in which businesses can work together to achieve the common aim of generating revenue and profi t. The joint venture is one such example. The classic joint venture typically involves two independent companies engaging together on a specifi c project, each contributing their own expertise and/ or fi nancial support and resources. This kind of relationship is more likely to be a meeting of equals, with both recognising that they have something to gain by pooling their fi nances and resources for a particular end.
It might seem unusual to be talking about such joint ventures in the context of franchising. However, there are a number of franchisors in the UK now that have combined the traditional business format franchise with the joint venture model to create the joint venture franchise. So how does this diff er from the traditional franchise model and what are the potential implications for any prospective franchisee?
In the traditional franchise model, one
or more individuals looking to acquire a franchise can choose either to set up in partnership as franchisees or incorporate their own limited liability company, which will be appointed as the franchisee. They will each have shares in that company and appoint themselves as its directors. The company will enter into a franchise agreement with the franchisor, with the individuals behind the franchise company typically joined into that agreement as guarantors of the franchisee company’s liabilities and obligations. The franchise agreement will contain the usual comprehensive provisions regulating and restricting the activities of both the franchisee company and the individual shareholders.
So, for example, the individuals behind the franchisee company will be prohibited from transferring any of their shares without the prior written consent of the franchisor. This prevents the franchisee from eff ectively transferring the franchised business to new owners, who have not been vetted and trained by the franchisor. While the franchisee will therefore be
heavily regulated in relation to how it conducts the franchised business, when it comes to making decisions that relate solely to the franchisee company itself, the
individual shareholders are relatively free to make their own independent decisions. In simple terms, the franchisee company
remains a completely independent entity from the franchisor. The only means that the franchisor has of controlling the activity of the franchisee (and the individual shareholders behind it) is through the franchise agreement itself. In the joint venture franchise model, again, there is a franchisee company, but here it is jointly owned by the individual franchisees and the franchisor. It is not, therefore, independent. Typically, the shares in a joint venture franchisee company are divided into two classes. One class of shares will have voting rights, but no right to share in any profi ts made by the company (voting shares). The other class will be the mirror image having no voting rights but entitled to share in the profi ts (equity shares). The majority, and in some cases all, of the voting shares will be held by the franchisor. The equity shares will be held by the franchisee.
In some models, the voting shares are
more evenly distributed but, generally, the franchisor will retain at the very least a majority percentage, giving it ultimate control over the franchisee company. Each class of shares will be given the right to appoint a certain number of directors to the board of the joint venture company. Again, the franchisor will usually retain the right to appoint more directors than the individual franchisees, giving it control of the board and the day-to-day running of the franchisee company. In terms of documents, the traditional franchise relationship is governed by a single franchise agreement between franchisor and franchisee. The documentation of a joint venture franchise is more complex. There will be a joint venture or
shareholders’ agreement. This will usually contain most, if not all, elements of the traditional franchise agreement, such as the grant of rights, training, operational regulations and restrictions, accounting, requirements and rules governing transfers of shares. It will also usually contain provisions regarding termination and restrictions of the activities of the individual franchisees after termination. Alongside the joint venture/shareholders’
agreement, the franchisee company will also have articles of association. All UK companies have articles of association in one form or another. These are the rules and regulations governing matters such as the classes of shares in the company, the appointment of directors and the conduct of their meetings, the calling and
conducting of shareholders’ meetings, the procedure for distributing profi ts, and other administrative matters.
In addition, franchisors adopting the joint
venture franchise model may take a charge over the assets of the franchisee company, usually by way of a debenture, or fi xed or fl oating charge, to secure the payment of all fees and any other debts owed by the franchisee company to the franchisor. In addition, both on the establishment of the joint venture franchise and on an ongoing basis, there are likely to be separate minutes and resolutions of both the directors and shareholders. These deal with various matters, such as the initial allocation of shares and the ongoing distribution of profi ts to the holders of the equity shares. Traditional franchise agreements are not themselves the easiest or most entertaining of reads. To a prospective franchisee, unless they have had some form of legal training, the documentation produced in relation to a joint venture franchise is likely to be almost incomprehensible. The key distinction any prospective franchisee should remember is that if they set up a company to be the franchisee in the traditional model, that company will be solely owned and controlled by them. If the company generates profi t, it will be up to the individual owners to decide when and how much of that profi t should be distributed. In the joint venture model, the franchisor is likely to control the management and operation of the franchisee company to a much greater extent, including as to when distributions of profi t should be made. Before entering into any franchise
agreement, a prospective franchisee is advised to seek independent legal advice on any agreements and supporting documents that they are being asked to sign. In the case of a joint venture franchise, they should expect there to be several complex documents to review and understand.
Andrew Hayward
Andrew Hayward is a director in the corporate and commercial department at Owen White Solicitors.
www.owenwhite.com andrew.hayward@owenwhite.com
October 2016 |
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