Other Expansion Methods

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 the various growth methods and 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)

• Control (depends on the employees)
• Possible higher profit per location

Disadvantages:

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

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

Limited Partnerships

Two Major Requirements:

1. The owner of the intellectual property 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 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.

Licensing (distributorships and dealerships)

Licensing is a common expansion method when the primary goal is the sale of additional products

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

• Distributors/Dealers not authorized to use the company’s Trademark – they operate under a different name ( may use : “Authorized Distributor/Dealer”)
• The Distributors/Dealers business must not be substantially identified with the trademark of the Franchisor (i.e. the product(s) must not represent a substantial percentage of the Distributor’s/Dealer’s sales)
• 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 (i.e. Monthly Royalties)

Which Expansion Method Is The Right One For Your Business?

Expansion Plan Includes	COL	JV	LP	License	FRAN
Raise capital		X	X		X
Add locations rapidly		x		X	X
Distribute additional product	X	X		X	X
License a “Turn Key” system					X
License use of Trademark(s)					X
Specify operating procedures	X	x	X		X
Provide ongoing support	X		X		X
Provide advertising/marketing support	X		X	x	X
Provide sales assistance	X		X		X