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Choosing the right business model is critical to opening and operating a business. Among the various options available, franchises and partnerships stand out as two potential pathways to business ownership. However, it is important to recognise that while a partnership is a distinct business structure, franchising is essentially a licensing agreement. This article will take you through what a franchise and a partnership are and how partnerships act as one avenue to run your franchise.
What is a Franchise?
Franchising is when a franchisee gets permission from an existing business (the franchisor) to use its brand and business operations. This permission is given in exchange for fees, including an initial franchising fee and ongoing royalty payments.
A franchise agreement serves as the contract between the franchisor and the franchisee. This agreement ensures both parties benefit from the exchange. A major advantage of the franchise business model is that the franchisee gets to use the name and operations of an established brand rather than building up its own brand and reputation from scratch. However, a downside is that the franchisee is bound by the franchisor’s executive choices, such as which suppliers they must use and ways of operating the business.
What is a Partnership?
A partnership is a business structure where two or more people open and share a business. Each party to a partnership is responsible for operating the business. A contract, known as a partnership agreement, will typically outline each person’s responsibilities.
The key difference between these partnerships is to what degree each partner is protected from the actions or decisions of the other partner.
A partnership is one way that you can structure a franchise. Partnerships offer flexibility in ownership and decision-making, making them an attractive option for franchises seeking collaborative management structures.
The concept of joint venture franchising is also worth noting. This refers to a partnership structure being utilised within a franchise agreement. Under this arrangement, two or more parties come together to jointly operate a franchise unit. The benefit is that the parties can share risks and responsibilities while benefiting from the franchisor’s established brand and operational support.Continue reading this article below the form
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Difference Between Franchises and Partnerships
The most significant difference between a franchise and a partnership is who owns the business. In a franchise relationship, the franchisor owns the overall franchise network. They supply the brand and operating systems to individual franchisees in exchange for a fee. The franchisee will own and operate their own branch. However, this ownership comes with the restrictions put upon it by the franchise agreement.
In contrast, all parties to a partnership own and operate the business. The partnership agreement might specify what partners own, what aspects of the business they own, and what they must contribute. Further, each partner might own a different percentage of the partnership. However, no single party will take an established leadership position like the franchisor in a franchise agreement.
Another key difference between franchisees and partnerships is how liability works. Franchises do not work under one specific corporate structure. This means liability will differ between each franchise depending on how its business is structured. For example, consider the franchise operates as a single company franchise. In that case, a proprietary limited company will operate as the franchisee. The franchise operates as a separate legal entity with its own assets, debts and liabilities. Accordingly, the franchisor is not personally liable for the actions of the franchisee company.
Similarly, liability in partnerships varies depending on the type of partnership. The table below outlines liability in different partnership types.
|Each partner has unlimited liability for the debts incurred by the partnership.
|Each partner is only as liable as the money they invest into the business.
|Each partner has limited liability.
As outlined above, a franchise may operate under a partnership structure. In that case, the partnership agreement will determine each partner’s liability and responsibilities within the franchise. The franchisees themselves may even be one of the partners in a partnership. In that case, they would have a stake in the business and share in its profits and liabilities according to the terms outlined in the partnership agreement.
Franchises and partnerships also differ with regard to autonomy. A franchise agreement may limit a franchisee regarding their contributions to the business. Generally speaking, a franchisee has no say in the strategic or creative vision of the franchise network. Instead, they must follow the franchisor’s directions or risk breaching the franchise agreement. In saying this, the franchisee has autonomy on how they run their franchised business, so long as they do so according to the agreement and operations manuals.
Conversely, in a partnership, there is typically no single leader. Therefore, partners have no specific guidelines to follow, and there are fewer restrictions. Of course, partners must always adhere to their partnership agreement with each other.
Finally, the distribution of profits and fees also varies between franchises and partnerships. In a franchise, the franchisee typically pays the franchisor:
- an initial fee. This is usually payable upfront in exchange for training and access to the franchisee’s operations manual; and
- royalty fees. This is typically paid as a percentage of business turnover in exchange for ongoing use of the business’ brand and operations.
On the other hand, in a partnership, profit distribution will depend on the type of partnership and the terms of the agreement. For example, in a limited partnership, the partner’s contributions to the business will determine its profits and losses. If the franchise operates as a partnership, the franchisee may be a partner in the agreement and would have a share in the profits.
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
Franchises and partnerships are two pathways to business ownership. However, it is important to recognise that franchising is essentially a licensing agreement while a partnership is a distinct business structure. Some of the key distinctions between these two business models include differences in:
- autonomy; and
If you need assistance understanding the differences between franchises and partnerships, 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 0800 005 570 or visit our membership page.
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