Q: What possibilities exist for a small group of people (two to four) co-owning a franchise as partners? Is this an effective method for owning a franchise business? Is it wise? What should we know and be aware of to help avoid problems if we do this?
A: There are always potential challenges associated with this type of business ownership structure ... and a few special issues when you're operating in the franchising industry. Let's start with a brief look at the general potential for problems and then talk about factors that may be unique to a franchise environment.
The problem with any business partnership really comes down to what happens when a decision needs to be made and the partners don't agree on what the decision should be. You absolutely must decide how to handle this situation before the problem arises, or you're in for a world of pain when you get to that point.
They say more marriages break up over money disputes than all other causes. The problem with partnerships is that they are basically all about money, so the chance that a financial disagreement might occur is much greater than in a marriage. In spite of this reality, most people enter into a business partnership with far less thought and preparation than they would a marriage.
This is a big mistake. The old saying that an ounce of prevention is worth a pound of cure is truer in terms of preparing for a partnership arrangement than just about any other endeavor you can imagine.
For this reason, most franchise companies put additional restrictions on a partnership entity to make sure they can avoid having to deal with the worst of the potential problems associated with this structure. Two common elements of these restrictions in franchising are:
- The designated operator. At a minimum, most franchise companies require your group or any other partnership to designate one specially authorized person they can go to for all decisions. Each person in your group will probably be required to sign forms in advance specifying a person as the designated operator and agreeing to be bound by whatever decision that person makes. Any other alternative simply doesn't work for a franchisor, because they can't have a franchise operation that's run by committee.
This may seem easy for you when you're in the courtship phase of the partnership relationship, but make sure you can live with the results of this decision. Even though a majority of the owners of the partnership can probably change this person later, a 50-50 tie will leave this person in control forever, which is an extremely common outcome in these types of relationships. Get ready to pick one leader from your group and live with the results, long term.
- Personal guarantees. Probably one or more of the people in your group plan to work in the business and one or more simply want to invest money. Most financial investor partners want to limit their exposure to just their investment.
In franchising, however, most companies require all the franchisees to personally guarantee the franchise agreement (most landlords also require this on your lease). The money partners, assuming they own perhaps 10 percent or more of the company, are almost certainly going to have to sign personal guarantees, and they need to be prepared for this to happen, or you're going to hit a wall very quickly.
This may all make a partnership sound like a terrible idea, but that's not the point at all. Just make sure you take the time to think through all imaginable situations and determine how you're going to deal with them in advance. If you are seriously considering this type of business ownership, my best advice is to hire a good business attorney, who will point out many potential problems and help you work through different scenarios before they occur. This may cost you and your friends a few bucks in the short term, but help ensure you remain friends in the long term, and that makes the expenditure well worth it.