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Allocating Risk

Franchising provides a unique opportunity to manage risk through the use of real estate. The additional risk and return associated with the ownership of real estate can be allocated either to the franchisee or the franchisor based on the specific goals of either party to grow more rapidly or hedge operating risk. Some franchise companies share real estate ownership between partners.

If the franchisor owns the real estate and leases it to you, then the franchisor has the additional risk/return generated by the real estate. If the franchisor owns the real estate, it makes money by getting royalty and lease payments. So, if something happens and you feel that the relationship with the franchisor is going badly, the first consequence is that the royalty is not paid. The second ramification is that the lease expense (to the extent that the real estate is held by the franchisor) is not paid. However, control is another element in the equation of ownership. The entity that owns the real estate has increased control. If there is a breach in the relationship between you and the franchisor, and the real estate is owned by the franchisor, then the franchisor could more easily replace you with someone else and continue doing business as usual. Conversely, if you own the real estate and the same situation occurs, then you might change the sign and continue doing business under another name. Although there are terms written into the franchise agreement that make these situations more complicated than presented here, the basic points are valid.


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