A franchise is a type of business relationship where one party runs a business under the brand of another. A partnership however, arises when two or more people co-operate the business and share the income. Each business structure has its own set of unique advantages and disadvantages to consider. This article will discuss some of these considerations to highlight differences between a franchise and partnership.
Franchise
Franchising involves a franchisee selling a product or service for a specified period in return for a payment to the franchisor. An agreement between the parties sets this out. Both parties are to benefit from the arrangement. Some key examples of franchises include Domino’s Pizza, Anytime Fitness and 7-Eleven.
Advantages
- The franchisee can run a business with an established brand. Reduces the risk of failure as potential customers will already be familiar with the product or service on offer. Support from the franchisor or other franchises may also be available if the business needs help.
- The franchisor can expand the business without the day to day hassle of managing on site. They also receive payment from the franchisee which can help grow the business further.
Disadvantages
- The franchisee loses some authority in decisions that they would otherwise have. The franchisor will ultimately have the final say on many major changes for the business. The franchisee must also pay a fee and follow the terms of the franchise agreement.
- The franchisor loses some oversight over the business in handing over responsibility to the franchisee. A poorly handled situation can damage the overall reputation of the franchise. A franchisor will also have to make decisions in conjunction with the franchisee as well as abide by the franchise agreement.
More on franchising can be found here.
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Partnership
Partnerships are created either formally or informally between 2-20 people. Each party is equally liable as well as entitled to profits. Partnerships are a simple and common way to run a business with other parties. Law firms, financial companies and other small businesses commonly adopt this business structure. A written partnership agreement is optional but is often useful in setting out the roles and responsibilities for all parties involved.
Advantages
- Easy and low cost to set up.
- Equal responsibility and share of profits.
- Being able to work together towards a common goal.
Disadvantages
- Disagreements between partners without a clear dispute resolution process can harm the business.
- Partners are personally liable when debts go unpaid. Partnerships are not their own legal entity.
- One partners actions can leave the other partners liable.
More on forming a partnership can be found here.
Conclusion
Clearly a franchise and partnership are two separate business structures with their own pros and cons. An individual looking to run a stable business and sacrifice creative input in return for extra support should consider a franchise. A partnership will be suitable where an individual can find other similar minded individuals and wants to be free from franchising restrictions. Setting up a comprehensive agreement however, is essential to both business structures. This can be altered to suit all parties and will form the basis of the relationship. Still unsure as to whether a franchise or partnership may be right for you? Talking to one of our business lawyers may help.
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