Generally, franchisors do not like pure investor franchisees because one of the reasons that franchising works so well in ensuring businesses are successful is that franchisees are actively involved in their franchise business and have a real interest in ensuring that the business is a success. If the franchisee is simply an investor that personal commitment may be lacking.
There are two exceptions to franchisors’ reluctance to take on pure investors as franchisees. The first is that a franchisee may have insufficient funds to take the franchise him/herself and therefore needs an investor to assist with the financing. Provided that the person who enters into the franchise agreement is committed to being actively involved in the franchise business, that ought to satisfy the franchisor but franchisors often require both the individual who is to be actively involved and the investor to be a party to the franchise agreement and so the investor, as well as the individual who manages the franchisee’s business, could be personally liable if the franchised business fails.
The second situation where investors are commonly involved in franchising is where major franchisors are not looking for individual franchisees who will be operating a single franchise business, but for more substantial investors/businesses who would be able to grow and commit to opening a significant number of franchises. These type of arrangements are commonly seen in the fast food industry. In such scenarios the individuals who take up these franchises or who own or manage the businesses that will take up the franchise will not be actively involved in each franchised business.
Written by: John Pratt
Partner, Hamilton Pratt