Franchising, licensing and joint ventures - Business Environment

To complete this review of the legal structure of business organisations, it is useful to consider three developments which have a legal aspect: franchising, licensing and joint ventures. All three may be seen as a means of carrying out a business venture in a way that reduces some of the risks normally faced by the entrepreneur.
Franchising, which has grown significantly in recent years, is an arrangement where one party (the franchiser) sells the right to another party (the franchisee) to market its product or service. In terms of their legal status the parties involved could be any of the forms described above, but in practice it is usually the case that the franchiser is a company while the franchisee tends to be a sole trader or partnership.
Both parties in law have a separate legal identity, but the nature of the contract between them makes their relationship interdependent and this has important implications for the operation of the franchise.
Franchise arrangements come in a variety of forms. Probably the best known is the ‘business format franchise’ (or ‘trade name franchise’) under which the franchiser agrees to allow the franchisee to sell the product or service with the help of a franchise package which contains all the elements needed to set up and run a business at a profit. These would typically include the brand name, any associated supplies, promotional material and other forms of support and assistance. In return the franchisee usually pays an initial sum or fee for the use of the service and its various elements, remits royalties based on sales and/or profits, agrees to make a contribution for consultancy, training and promotion, and undertakes to maintain standards. Wimpy, Kentucky Fried Chicken, Burger King, Pronta print and Dynarodare examples of this type of franchise.
Other forms include manufacturer/retailer franchises (e.g. car dealers), manufacturer/ wholesaler franchises (e.g. Coca-Cola, Pepsi) and wholesaler/retailer franchises(e.g. Spar and Mace) and it is estimated by the industry’s trade body the British Franchise Association that in retailing alone franchising accounts for over 20 percent of sales in the United Kingdom. One indication of its growing significance is the spread of franchising into further and higher education, with universities and other colleges of higher education franchising some of their courses to local further education colleges, which in turn may franchise some of their courses to schools and/or sixth-form colleges. Another indicator is the decision by many clearing banks and firms of accountants to establish franchise sections to help and advise individuals who want to open a franchise or who have already done so and are seeking further guidance.
Undoubtedly the mutual benefits to be derived from a franchise arrangement help to explain its popularity as a way of doing business in both domestic and external markets and it has proved an attractive vehicle for some companies seeking rapid overseas expansion, without undertaking substantial direct investments although this is sometimes necessary to support the operation (e.g. McDonald’s had to invest in a plant to make hamburger buns in the United Kingdom). Equally,many would-be entrepreneurs find the security of a franchise more attractive than other methods of starting a business, especially as there is some evidence to suggest that franchises have better survival rates than the more conventional forms of independent enterprise (e.g. sole traders).

Current indications are that this popularity is likely to continue into the foreseeable future, although it is more likely that greater selectivity of potential franchisees will occur as the franchise industry becomes more mature and attempts to gain an increased degree of public respectability. Franchisees, too, are likely to become more particular about the businesses they agree to deal with, as they endeavour to join the enterprise culture. It is, after all, the franchisee who has to bear the financial risk of the business in return for a share in the profits; the franchiser has a reputation to think about.

Licensing is another form of non-equity agreement under which a firm in one country (the licensor) authorizes a firm in another country (the licensee) to use its intellectual property (e.g. patents, copyrights, trade names, know-how) in return for certain considerations, usually royalty payments. Licences may be granted to individuals, independent companies, subsidiaries of a multinational company or to government agencies and the rights granted may be exclusive or non-exclusive.
Companies invariably enter into licensing agreements to gain certain advantages.
These might include:

  • Reducing competition by sharing technology.
  • Seeking overseas profits without direct foreign investment.
  • Protecting an asset from potential ‘pirates’.
  • Avoiding restrictions on foreign investment or imports imposed by other countries.
  • Recouping some research and development costs.
  • Gaining a share of an overseas market.

Needless to say, most organisations granting licences tend to be based in the advanced industrial economies and are frequently multinationals which regard their trademarks and technologies as an integral part of their asset base. One problem of transferring the use of such assets to another firm is that the owner loses a degree of control over the asset, including the quality of production, and this may affect the product’s image and sales elsewhere. Another is the possibility of the licensee dominating the market after the agreement ends, even to the extent of excluding the licensor from the marketplace by aggressive competition or the development of an alternative product.

Joint ventures
The term ‘joint venture’ tends to be used in two ways: to describe a contractual agreement involving two or more parties; or to describe a jointly owned and independently incorporated business venture involving more than one organisation. It is the latter usage which is mainly applied here.
Joint ventures which are popular with international companies can take a variety of legal forms and almost every conceivable type of partnership may exist, ranging from two companies joining together in the same domestic market (e.g.Sainsbury’s and British Home Stores set up the Seva centre chain), to joint224.
Sometimes numerous organisations may be involved and these may be based in one country or in several. Where this occurs the term ‘consortium’ is often used, as in the case of TransManche Link (TML), the international joint venture which built the Channel Tunnel.
As with licensing and franchising, joint ventures have increased in popularity in the last 25–30 years and have been one of the ways in which international companies have sought to develop an overseas market, particularly in the face of import restrictions, or heavy research and development costs. Multinational car companieshave been active in this field as evidenced by past links between General Motors and Toyota, Ford and Mazda and these arrangements look likely to continue as markets become more global. For western companies wishing to exploit the gradual‘privatization’ of the former planned economies of eastern Europe, joint ventures with indigenous producers are likely to prove a safer bet than direct inward investment, particularly given the degree of economic and political uncertainty. They are also likely to prove more politically acceptable in states seeking to establish their own economic independence and identity after almost 50 years of regional domination.

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