Legal and Business Economics Aspects of Using Joint Venture as the Underlying Basis of Franchising

Christina Gudmansen Funch, Gamze Acili & Roza Özdemir

Student thesis: Master thesis

Abstract

For the purpose of gaining relational rent and in order to optimize, this master’s thesis seeks to examine whether the principles of strategic contracting including the joint risk sharing principles seen in joint ventures can be used in adjunction to the business model of conventional franchising. Franchising has been widely used through the last decades all over the world why one can argue that the business model is efficient e.g. when scarcity of capital is a reality for the franchisor or when the franchisee has abundant and cheap access to capital. Often, this is not the case since markets feature risk neutral franchisors with low cost of capital and risk averse franchisees with high cost of capital, as a starting point. Thus, by assessing if 50/50 risk allocation as seen in some joint ventures solves the following problems which often arise in relation to conventional franchising. These problems include but are not limited to lack of commitment from the franchisor due to the lack of risk investment, lack of access to the non-marketable knowledge of the counterpart and the fact that time-limited agreements tend to lead to opportunistic behavior from both parts when nearing the end of the agreement. Since the joint venture can be distinguished into two models, i.e. the contractual joint venture (nonequity joint venture) and the corporate joint venture (equity joint venture), the above-mentioned assessments are reached by comparatively analyzing the two joint venture models while simultaneously comparing gains and risks to the conventional concept of franchising. Moreover, the analyses are conducted by partially or fully applying relevant economic theories and legal rules and by an integrated understanding of both fields. The study concludes that a model of franchising built on either joint venture foundation and by including elements of strategic contracting will assist in solving the aforementioned problems, among others, and contribute to relational rent. Therefore, it is regarded as a better alternative to conventional franchising. Thus, one may view the equity joint venture as an extreme solution when the same gains can be reached by applying a more strategic aim to the conventional franchise contracts. Hence, the equity joint venture is only preferred by the franchisee when this part is extremely risk averse and when the franchisor possess a critical resource, which the franchisee desires to decrease its resource dependency from.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2019
Number of pages134
SupervisorsKim Østergaard & Bent Petersen