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:
Disadvantages:
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:
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Not designed for businesses wishing to rapidly expand their distribution system using the capital and managerial skill of a large number of people
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Legally difficult, if not impossible, to create numerous joint ventures without being considered a franchise
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This method is typically used by companies which have limited expansion goals related to additional locations
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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
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The joint venturers should not receive compensation from the venture other than as a profit participant or an employee
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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
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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:
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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.
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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).”
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The Distributors/Dealers business must not be substantially identified with the trademark of the Franchisor.
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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).