Planning on a Partner for Your Franchise? Here are some Pro’s and Con’s.

by Ed Teixeira

It’s not uncommon for prospective franchisees to plan on having a partner for their new franchise. However, there are advantages and disadvantages to a franchise partnership.  Here are some pros and cons.

I can recall the time that I owned and operated a large franchise with a partner. We were equal owners and when business was good and the franchise was profitable all was right with the world. However, when we experienced some operational problems and revenues decreased the strength of the partnership was severely tested. Individuals that plan on operating a franchise under a partnership arrangement need to be aware of the advantages and disadvantages. Above all, there needs to be recognition that a franchise partnership will bind the partners to the obligations of the franchise contract. Through good times and bad, the partners must be prepared to weather the challenges and problems that can arise.

Before entering a partnership, be sure to use an attorney to establish the partnership agreement or in the case of a corporation, a shareholder agreement that will set forth the rights, duties and obligations of each partner. For example, there are partnerships where one partner provides the majority of the investment capital but will play a less active role in the day to day franchise operation.

Key items to establish:

• What role will each partner play in operating the franchise?
• How can the partnership be dissolved if a partner wants out?
• How will the franchise be capitalized?
• How will profits be shared?
• What are the allowable business expenses a partner can incur?
• What if there is a dispute regarding an important business decision?
• What is the disposition of the franchise ownership, if a partner dies?

An experienced franchise attorney will be able to identify other issues that will need to be included in an agreement.

Advantages of a Franchise Partnership

• A partnership can provide more capital for the franchise.
• Each partner can focus and work on specific parts of the franchise operation.
• Partners can have a synergy that will result in more creativity and problem solving.
• The skills and experience of each partner can complement each other.
• A partnership can be better positioned to acquire additional franchisees.
•  Disadvantages of a Franchise Partnership
• The partners will be jointly and individually liable under the franchise agreement. An action by one partner can impact another.
• Certain decisions may need to be shared by the partners. This can cause delays and even disagreements.
• An issue or conflict among partners can escalate into a personal problem.
• A partner’s spouse can sow the seeds of disagreement. Some partners may feel that they work harder than the other, which can create problems in regards to sharing the franchise profits.
• A conflict can lead to a costly and acrimonious separation. This could harm the franchise operation and ultimately its value.
• The personal relationship of partners can add to potential problems. One partner may be offended by the actions of another.

It’s important that franchisees recognize the advantages and disadvantages of a partnership. Be sure to consider all aspects of the relationship and use a competent attorney to structure an agreement.

© 2011 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com