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)
Corporate Expansion
Advantages:
- 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 |
COL = Corporate Owned Locations JV = Joint Venture
LP = Limited Partnership
License = Dealership or Distributorship
FRAN = Franchise