When setting up franchises and expanding a franchising company, you will often find that your franchise buyers will set up a variety of legal entities based on their financial needs, tax situations and advice of their personal or corporate accountants and attorneys. This of course is to be expected, however as a franchisor you also need to be sure that there is actually someone responsible for the ongoing viability of the franchise outlet and the royalty fees you charge under the franchise agreement.

You need to understand and have knowledge of who is behind the mask. As a franchisor you need to be sure that any new members or investors coming into a corporate entity are bound by the same terms and conditions as the other members of the team. It is for this reason that I modified our franchise agreement to include this clause below;

5.2.3 Limited Partnership or Limited Liability Company

If Franchisee is a general or limited partnership or a limited liability company, then the admission of a new partner of member, or the redemption, purchase, liquidation or transfer of a partnership or limited liability company membership interest or any disposition of the assets of the partnership or company, in one transaction or in a series of transactions which, in the aggregate, result in either

(i) more than a twenty-five percent (25%) change in the beneficial ownership of the corporation, or

(ii) a change in the voting control of the partnership or company, is a transfer which requires the consent of Franchisor. The partnership agreement or limited liability company operating agreement must contain the following provision: