Master Franchising: Expanding Your Reach With Regional Partners – Traditional franchising is a successful expansion model for many companies, even internationally, but it is not always the right choice. With the help of franchisors, legal practitioners, and business advisors, an individual analysis must be conducted for each potential new market to select the optimal expansion method to maximize benefits, take advantage of efficiencies, and minimize pitfalls. Several common structures are used in international systems, including company-owned operations, direct unit franchising (including direct unit and multi-unit or area development agreements), master franchise agreements, joint ventures, and exception-based franchising in the United States. Each has its advantages and disadvantages in light of the characteristics of the target market. This chapter focuses on some aspects of two specific alternatives to traditional franchise systems: joint ventures and exception-based franchising.
Establishing an international joint venture requires detailed planning and thoughtful strategy but ends up creating a successful and profitable business. As the name suggests, a joint venture requires a second party to join your company. Joint ventures arise for a number of reasons, including satisfying local ownership requirements in some countries and partnering with a strong and experienced joint venturer. With the right business partner and the right market, a joint venture can be a successful, efficient and cost-effective alternative to franchising.
Master Franchising: Expanding Your Reach With Regional Partners
There is no single definition of the term “joint venture”. A joint venture can take many different forms, styles, understandings and arrangements. “An international joint venture is often described as two or more business partners in different jurisdictions agreeing to exchange resources, share the risks, and share the rewards of the joint venture.”
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In a joint venture, the franchisor and the local entity in the target country come together to form a new entity with the objective of undertaking franchise development in the region.
In this model, each party holds an ownership stake in the company, the proportions of which vary significantly depending on the parties’ desired goals, their respective negotiating positions, and the legal and economic practicalities of the market. The franchisor usually grants a master franchise agreement
A joint venture entity (in which it has its own interest), maintains a degree of direct control commensurate with its interest. In this sense, a joint venture represents something of a compromise between the ceded control of a master franchisee relationship.
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And the subsidiary has control. (Of course, since the joint venture entity itself becomes the franchisee or master franchisee, the joint venture approach does not eliminate the need to consider the effects of applicable franchise laws.)
The role of a joint venture varies depending on the nature of the target market. If the purpose of the joint venture is to meet local ownership needs, the local party may have a limited role in the operation of the franchise business. In contrast, joint venture partners, as master franchisees, often have a decisive role in adapting the franchise system to local trade practices and market conditions, using their resources, regional knowledge and influence.
Subject to individual negotiations and applicable ownership requirements under target country law, franchisors may increase their ownership interest and degree of control in proportion to their experience in foreign markets.
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A joint venture does not guarantee success. The decision to enter into a joint venture, especially an international one, should be carefully considered. Increased control, reduced capital investment, reduced risk, local entity status and potential for favorable tax treatment are some of the factors that make joint venture relationships attractive expansion structures. However, entity complexity and greater exposure to local antitrust and competition laws are factors that detract from joint venture benefits.
Joint ventures offer advantages over a subsidiary or branch structure because they allow the franchisor to integrate the local industry knowledge, practices, and distribution networks of its venture partners as well as quickly integrate into a new market.
In a traditional franchise system, the franchisor’s degree of control over his franchisee is limited in principle by the contractual terms of the franchise agreement and the pragmatic nature of the franchisor-franchisee arm’s length relationship. Some franchise relationships face major challenges because of control issues – the franchisor may prefer a higher level of control than the franchisee desires. Franchisors may attempt to establish brand control through their franchise agreements, establish strict brand standards, and have extensive rights to inspect, control, and monitor franchisees, but franchisees may relinquish controls they deem excessive. Franchisees can generally benefit from the opportunity to benefit and benefit from the franchise’s intellectual property rights, branding, business systems, marketing strategies, etc., which they invest a lot in and often consider in the early stages of starting a business. Franchise their own companies.
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In a joint venture, the franchisor can have some joint control over its international business through a contractual relationship with its local joint ventures and through a shareholder agreement at the corporate level. Depending on the franchisor’s ownership and voting rights, the joint venture franchisor may have a board seat and other levers that give the franchisor a greater degree of control. Joint venture members generally have legal and contractual rights – and responsibilities – in proportion to their share in discussions about business growth, strategy, etc. The franchisor may still be required to transfer some of its know-how under the franchise agreement, but a joint venture structure generally gives the franchisor the opportunity to more carefully and easily monitor how this know-how is used in practice. Where there is a high degree of institutional uncertainty and limited formal protections for businesses, a high degree of franchisor control is particularly desirable to reduce the risk of “branding” and other harmful practices.
The basis of a joint venture derives from the sharing and pooling of resources and expertise for a specific business purpose. The parties meet synergistically and utilize their respective capabilities, knowledge and resources to achieve their common business goals, and the business benefit is often much broader than the franchisor’s traditional rights to use intellectual property rights and sell products. Access to the local partner’s business infrastructure, know-how, and supply and distribution network greatly reduces the strain on the franchisor’s resources that typically accompanies a solo venture into a new market, and the local partner’s capital contribution provides the franchisor with proportionate relief. . The joint venture partner shares responsibility for profits and losses according to a predetermined ratio and may participate in the day-to-day operation of the franchise system. By sharing equity ownership or financial commitments in the form of loans or convertible bonds and by pooling resources to operate the joint venture, both the franchisor and the local partner contribute significantly to the successful start-up and operation of the business, and both can. Avail its significant benefits. . For the purposes of obtaining visas and work permits, the local firm may also host staff of the foreign franchisor sent to the area for management or training.
A disadvantage of a joint venture can be the burdensome process and administrative costs involved in setting up a new entity. Doing business in a new jurisdiction increases the risks and costs of requiring statutory license registration and compliance with regional laws and regulations for company formation. Establishing and enforcing a watertight joint venture shareholder agreement is also a onerous task, but its importance cannot be overstated. Exit options (such as strategic third-party sales, mergers and acquisitions, buybacks, drag-along or tag-along rights, and deadlock call or put options) should be well thought out and have a detailed valuation methodology. Exiting shareholders.
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When deadlocks occur between joint ventures, there are practical challenges to exiting the business and liquidating the business.
– in part because the relationship is bound by at least two main agreements: (1) the (master) franchise agreement between the franchisor and the joint venture; and (2) the joint venture agreement between the owners of the joint venture (eg, the shareholders’ agreement). Here, the contractual relationship between the joint venture partners is not terminated by termination of the (master) franchise agreement as in a conventional franchise agreement; Instead, there is an additional layer consisting of a joint venture agreement. Therefore, even in the event of a dispute between the franchisor and the franchisee, the joint venture relationship between the joint venture parties – and consequently the franchise business – will continue until the dispute is resolved. In other words, if the joint venture partners wish to terminate the franchise relationship, the joint venture partner must also consider its other partners to liquidate the joint venture – that is, the joint venture partners must terminate the joint venture agreement. This important legal (and regulatory) step is against terminating the (master) franchise agreement and the jointly managed franchise relationship.
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