Based on a company's industry and operation and the controls and policies it

wishes to dictate to individual locations, there are a number of possible

expansion methods that a company may consider. The information provided

in this section is a basic overview of four non-franchise expansion methods.

It is not intended to be a full discourse or an opinion as to the options

available to you. You should consult with your attorney or contact us for

additional information.

Primary "Non-Franchise" Expansion Methods

1. Corporate Expansion (company owned and operated locations)

2. Joint Ventures/General Partnerships

3. Limited Partnerships

4. Licensing (Distributorships/Dealerships)

1. Corporate Expansion

Advantages:

• Possible higher profit per location

Disadvantages:

• Requires additional employees and an expanded hierarchy
• Decreases ability to rapidly expand rapidly
• Increases capital risk

2. Joint Ventures/General Partnerships

This method is basically a vehicle for aggregating capital and managerial/entrepreneurial skills. The owner gives up equity (and possibly control) to an entity which will be used to expand the business.

Disadvantages:

• Not designed for businesses wishing to rapidly expand their distribution system using the capital and managerial skill of a large number of people
• Legally difficult, if not impossible, to create numerous joint ventures without being considered a franchise
• This method is typically used by companies which have limited expansion goals related to additional locations
• The joint venture must be the owner of the trademark used in connection with the distribution of goods or services, or have a royalty-free license to use the marks
• The joint venturers should not receive compensation from the venture other than as a profit participant or an employee
• All of the know-how, trade secrets, marketing plans and intellectual property used by the venture in conjunction with the distribution of its goods and services should be owned by the venture
• All of the joint venturers should be actively engaged in the management of the venture

NOTE: These rules can vary by state

3. Limited Partnerships

Two Major Requirements:

1. The owner of the intellectual property (i.e. the business system) must assume the role of the general partner and use the Limited Partnership solely to raise capital; OR the owner of the intellectual property must be willing to transfer ownership of the IP to the limited partnership

2. Limited partners are usually required to be passive investors

NOTE: If careful consideration is not paid, the Limited Partnership may constitute a security and fall under the Securities Act of 1933.

4. Licensing (distributorships and dealerships)

Licensing is a common expansion method when the primary goal is increasing the lines of distribution related to the sale of the company’s products.

This expansion method differs from a franchise in the following respects:

• May not charge a fee in excess of $500 prior to or during the first six months of operation as a condition of the licensee commencing operation of the business.
• Distributors/Dealers are not authorized to operate the business using the company’s Trademark – they must operate under a different name. However, the licensee is permitted to state that they are “an authorized distributor/dealer of XYZ (company or product name).”
• The Distributors/Dealers business must not be substantially identified with the trademark of the Franchisor.
• Consideration should only be paid by Distributors/Dealers to the Company in the form of bona fide wholesale purchases of products from the Company - no additional fees should be charged (such as royalty or advertising fees).