These are two popular business models that people often get confused about. Both franchise and joint venture involve working together. While in franchising, a franchisee can use the logo, label, brand name, trademark of the company, in a joint venture the partners share the expenses and profits of the business.
There are differences between franchising and joint ventures which are important to understand how the two models differ. In this article, we explore the differences between the two and the benefits and risks involved in each.
What is franchising?
To know the difference between franchise business and joint venture, let us first see what is franchising. Franchise business is a commercial association contract where two independents, as well as legal organizations, are involved. When a franchise agreement is made, one party is referred to as the franchisee and the other is called the franchisor. The franchisor agrees to provide their brand’s products and services to the franchisee for selling. The franchisee, in turn, pays a royalty fee to the franchisor every month.
The three major elements of the franchise business model are as follows:
- The franchisee obtains the right to use the trademark of the organization
- The business model used is the same as that of the franchisor, hence it is an established one
- The franchisor will provide the training and guidance that is needed to run the business
In a franchise agreement, there is an initial fee payment for setting up the business. This is followed by a monthly fee based on the revenues generated from the sales.
What is a Joint venture?
A joint venture is a business model where two parties having similar business objectives and goals come together in a joint investment agreement which is based on some strategic alliance. Two businesses come together and they provide services or products into new markets. The market may either be local or international. The two parties work hard to have a mutual profit. The operational principles of the business are also decided mutually by both partners. In joint ventures, both parties put their best efforts in pursuit of self-interests. Decisions are taken together which is a psychological perk. Also, the chances of having bigger and better outcomes are higher when working together towards the same goal.
Franchise or joint venture?
Benefits of Franchise Business
The franchise business model has several benefits which are listed below:
- There is a readymade business model that can be used. This model has been perfected and proven over the years.
- The brand’s established reputation and an existing customer base can be of use.
- Training and ongoing support are provided to the franchisees to ensure the business runs on maximum profit.
- The purchasing power of the franchise helps to save a lot of money on supplies and inventory.
- The territory allocated to your franchise is likely to be exclusive. You might not face competition from any other franchisee of the brand in the same location.
- Financing the franchise business is much easier. Most lenders give almost 70% of the cost of buying the franchise.
Disadvantages of a franchise business
Some disadvantages of stepping into the franchise business system cannot be completely ignored. Before you decide to take up the business know the following cons:
- The costs involved are quite high. First, there is the franchise fee for buying the business, then the royalty fee based on sale revenue, marketing fees, and additional set up costs.
- Even though you own the franchise, the business model, and how the company operates will ultimately be the franchisor’s decision. Franchisees have very little say in this regard.
- The franchisor will periodically demand your performance statistics. These statistics will affect your business.
- The actions of the franchisor or any other franchisee that tarnishes the image of the brand will have a negative impact on your sales and profits as well.
Advantages of a Joint Venture
Joint ventures have many advantages which are:
- The resources and expertise that your partner brings along can be beneficial.
- The responsibilities and the costs of running the business are shared between the partners.
- With a partner by your side, the purchasing power also increases.
- You can get access to new markets and distribution channels with a joint venture.
- It can be used flexibly, where you get into a joint venture to solve some small business issues.
- The business grows faster, making you more productive. The profits generated also become higher.
Disadvantages of a joint venture
- The profits you make needs to be shared with your business partners.
- The joint adventure needs to work effectively. For this, all partners should have similar objectives and values. You have to do proper research to ensure your partner has the same objectives before confirming the partnership. For the business to be successful the following are important:
- A common aim that should be communicated properly
- Investment, expertise, and assets to contribute should be at similar levels
- Both partners should be able to work together despite the differences in management styles and working cultures.
Which Business to Choose?
Self-determination
This is a major difference between joint ventures and franchising. The joint venture usually has a higher level of determination when compared to franchising. In franchises, there is a plan and regulations that every franchisee needs to follow. In a joint venture, however, the partners are not obligated to follow any standards or protocols of other partners. Joint ventures usually offer a new market for the products. Hence, self-determination is a much-required attribute to be successful in a joint venture.
Training and professional growth
In a franchise, the franchisor is responsible for providing training and guidance to all the franchisees. In a joint venture, one company is not obligated to train the employees of the partner company. Each company is responsible only for the training and professional development of its employees.
Risk factor
The risk factor is higher in a joint venture as compared to franchising. There are risks that the investment fails and expectations are not met. Franchises work under an already developed and successful business model, hence the chances of failure are much lower in this.
When should you choose to franchise?
Here are some factors to consider when taking up the franchise business:
Security
If you want a secured business adventure then franchising is the perfect choice for you. The franchise organization has an already established customer base and its business strategy is a tried and tested one. So, the investment you make is a safe one. The success will, however, depend on how you run the franchise and the demand for the products you are selling.
Support and training
The franchisor is interested in the success of the franchise and therefore they make sure the franchisees are trained well to run the business successfully. The franchise fee you pay initially is mostly used for your training. You will earn how to run the business effectively and also additional skills in marketing, staff management, and recruitment. Throughout your term of business, the franchisor will provide support to help your business grow.
Long term commitment
Being a part of the franchise involves a long term commitment. One needs to dedicate from 2 to 25 years in a franchise organization. The average ranges around five years. Sign the franchise agreement only if you are willing to put in your time, effort, and money for a long duration. If you are happy with alliance you can renew the contract as well.
When to choose a joint venture?
The factors to consider when you want to get into a joint venture are:
Risk-taker
If you are not afraid to take a risk, then a joint venture can be an option for you. It does not involve a successful business model like a franchise, hence there is no guarantee that the business will succeed. If you are launching into a new market, building a customer base can be tough. Also, the responsibilities and decisions are shared between the partners.
Experience in industry
To start a joint venture, one should have experience in the industry. The risks involved are higher, so a deeper understanding of business strategies and the market is necessary. Otherwise, the investment might be a failure. But joint ventures can be a great learning experience where your partner’s experience teaches you a lot.
Short term solution
Joint ventures are usually done to achieve a goal which is a short-term solution to some business issue. On reaching the goal or objective the parties can either start another business goal or can part ways.
Conclusion
We have seen how franchising and joint ventures are two very different business models. The business you choose will depend on your current situation and the business goals that you have. Franchise business models will be suitable for ones seeking security and an established model. If you are looking forward to taking a risk for higher profits in a short time, a joint venture is appropriate. Whatever you choose deep research is always recommended before you make a final decision.
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