How to Make a Franchise Partnership Work

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Q:What possibilities exist for a small group of people (two to four) co-owning afranchise as partners? Is this an effective method for owning a franchisebusiness? Is it wise? What should we know and be aware of to help avoidproblems if we do this?

A: There are always potential challengesassociated with this type of business ownership structure … and a few specialissues when you’re operating in the franchising industry. Let’s start with abrief look at the general potential for problems and then talk about factorsthat may be unique to a franchise environment.

The problem with any business partnershipreally comes down to what happens when a decision needs to be made and thepartners don’t agree on what the decision should be. You absolutely must decidehow to handle this situation before the problem arises, or you’re in for a worldof pain when you get to that point.

They say more marriages break up over moneydisputes than all other causes. The problem with partnerships is that they arebasically all about money, so the chance that a financial disagreement mightoccur is much greater than in a marriage. In spite of this reality, most peopleenter into a business partnership with far less thought and preparation thanthey would a marriage.

This is a big mistake. The old saying thatan ounce of prevention is worth a pound of cure is truer in terms of preparingfor a partnership arrangement than just about any other endeavour you canimagine.

For this reason, most franchise companiesput additional restrictions on a partnership entity to make sure they can avoidhaving to deal with the worst of the potential problems associated with thisstructure. Two common elements of these restrictions in franchising are:

Thedesignated operator.

At a minimum, most franchise companiesrequire your group or any other partnership to designate one speciallyauthorized person they can go to for all decisions. Each person in your groupwill probably be required to sign forms in advance specifying a person as thedesignated operator and agreeing to be bound by whatever decision that personmakes. Any other alternative simply doesn’t work for a franchisor, because theycan’t have a franchise operation that’s run by committee.

This may seem easy for you when you’re inthe courtship phase of the partnership relationship, but make sure you can livewith the results of this decision. Even though a majority of the owners of thepartnership can probably change this person later, a 50-50 tie will leave thisperson in control forever, which is an extremely common outcome in these typesof relationships. Get ready to pick one leader from your group and live withthe results, long term.

Personalguarantees.

Probably one or more of the people in yourgroup plan to work in the business and one or more simply want to invest money.Most financial investor partners want to limit their exposure to just theirinvestment.

In franchising, however, most companiesrequire all the franchisees to personally guarantee the franchise agreement(most landlords also require this on your lease). The money partners, assumingthey own perhaps 10 percent or more of the company, are almost certainly goingto have to sign personal guarantees, and they need to be prepared for this tohappen, or you’re going to hit a wall very quickly.

This may all make a partnership sound likea terrible idea, but that’s not the point at all. Just make sure you take thetime to think through all imaginable situations and determine how you’re goingto deal with them in advance. If you are seriously considering this type ofbusiness ownership, my best advice is to hire a good business attorney, whowill point out many potential problems and help you work through differentscenarios before they occur. This may cost you and your friends a few bucks inthe short term, but help ensure you remain friends in the long term, and thatmakes the expenditure well worth it.

About the Author

Jeff Elgin has developed a consulting system that matches pre-screened, high-quality prospective franchisees with the franchise opportunities that best fit their personal profile.