Strategic and Structural Alternatives to Franchising

For one reason or another, many successful business opportunities do not meet the foundational requirements needed to develop a franchising program, or they simply choose to leverage their intellectual capital in a different manner. They pursue these alternatives for various reasons:

Why Are These Alternatives Considered?

• To avoid the perceived obligations of being a franchisor;
• to avoid the disclosure requirements of federal/state law, such as making the Franchise Disclosure Document and Franchise Agreement;
• because companies are afraid of “perceived liability risk” of being a franchisor;
• to achieve greater distribution efficiencies or don’t need (or want) the control;
• because companies don’t need or want their trademarks licensed;
• because companies aren’t truly prepared to be franchisors or lack the proprietary foundation to truly have usable systems;
• because some international companies are not franchisors in their home country and don’t want to be in the U.S.

Questions for Companies to Ponder:

• From a strategic and structural perspective, if a company has determined to structure a program which will create an exemption for it from one or more of the definitions of a franchise, on what basis will the company rely on the exemption? What kind of sacrifice is the company willing to make?
• Will the company choose not to include a license of its trademark at the cost of the value of its goodwill?
• Will the company choose not to provide significant support to its distribution channels at the cost of losing them to a more supportive competitor?
• Will the company loosen the grip over its distribution channel at the risk of sacrificing quality control?
• Will the company waive the initial fee at the risk of the program becoming a loss leader or worse?

These are difficult decisions. The solutions are not clear cut from a business or from a legal perspective. It is critical that a company in this position work with qualified counsel to identify an alternative that will have a reasonable basis for an exemption and still make sense from a strategic perspective. The balance of this chapter will look at the many alternatives currently being tested by many U.S. and oversees companies. As you can see, the lines of demarcation are not always clear. The differences between many of these alternatives may in fact be in name only. Some of these concepts are truly innovative and have not been truly tested by the courts or the regulators. In these borderline cases, a regulatory “no-action” letter procedure is strongly recommended. Other concepts are not very innovative at all and merely borrow from long-recognized and analogous legal relationships such as chapter affiliation agreements in the non-profit arena or network affiliation agreements in radio and television broadcasting.

Andrew J. Sherman is a Partner in the Washington, D.C. office of Jones Day, with over 2,500 attorneys worldwide. Mr.Sherman is a recognized international authority on the legal and strategic issues affecting small and growing companies. Mr. Sherman is an Adjunct Professor in the Masters of Business Administration (MBA) program at the University of Maryland and Georgetown University where he has taught courses on business growth, capital formation and entrepreneurship for over twenty-three (23) years. Mr. Sherman is the author of twenty-one (21) books on the legal and strategic aspects of business growth and capital formation. His eighteenth (18th) book, Road Rules Be the Truck. Not the Squirrel. (http://www.bethetruck.com) is an inspirational book which was published in the Fall of 2008. Mr.Sherman can be reached at 202-879-3686 or e-mail ajsherman@jonesday.com.