Is There Such Thing As A Joint Venture Franchise Model?

18/03/2019 08:00 | Start a business

Franchise vs Joint Venture article

Originally posted 23/10/2017. Updated on 18/03/2019.

When youíve made the decision to become the boss, franchising offers a great model of support, brand recognition and the ability to generate an immediate income. But this isnít the only way that you can enter the entrepreneurial world. A joint venture (JV) with a partner you trust could actually be a better alternative for some business types, particularly those that have unique ideas that are yet to be franchised. Understanding the pros and cons of each option can help you choose the working relationship that is better suited to your personality, budget and ambitions.

What is a joint venture?

Letís start by understanding what a joint venture is. A JV is an agreement entered into by two or more business entities for a specific project or other business activity. Usually the JV initiates a separate business entity, to which all owners contribute with an agreement on how the entity will be managed. In some cases, the individual entities keep their individuality and simply operate under a joint venture agreement. Whichever route is taken, the parties in the JV contribute towards the running of the company and share in both the profits and the losses, according to the joint venture agreement.

Joint Venture vs Franchise

Advantages

You know what to expect when you buy a franchise. You pay the franchise fee and the company provides you with the equipment and necessary training to sell your product or service. Because youíre now part of an established business, you get instant brand recognition and access to an existing customer base - allowing you to hit the ground running. You also benefit from the advice and experience of the franchisor and the experts within the franchise. Youíll get guidance on everything from the location of your franchise to the staff recruitment process.

However, there are numerous advantages to choosing a joint venture, too. Two or more parties with a common interest are coming together to try to make a profit on the same business idea. Each party contributes money into the project and takes responsibility for tasks that are suited to their unique skill set. There is scope to develop and grow the venture at their own pace, calling on each otherís expertise and insights to take the enterprise in new directions. Neither party is bound by strict rules or guidelines, and more control can be exerted over the JV. Of course, if the JV proves to be a success, the business can always be franchised at a later date.

Disadvantages

As with most things in the business world, there are some drawbacks to both options.

With a franchise, a monthly royalty fee is paid to the franchisor. This can limit the amount of income that can be generated, as the fee usually comprises a percentage of the profit made. The more successful you become, the more you must pay out to the franchisor. This can be tough, especially at the start of your franchise career when your customer base is still being built. Youíll also be expected to follow a stringent set of rules outlined in the franchise agreement. The obligations you must adhere to are often very detailed and this can leave little room for innovation or individual creativity.

Yet, where a franchisee can rely on the franchisorís experience, a joint venture partner must be able to anticipate any challenges that may occur. If the JV fails, the contracted parties must find a buyer for any property or equipment that has been purchased, since there is no franchisor who may be prepared to buy them back. It might also take longer to generate an income with a JV compared to a franchise, as the initial investment may be used to get basic procedures and processes in place, instead of being spent on marketing. A business thatís not fully operational cannot be promoted, but without effective marketing, customers donít know the business exists.

So, can you have the best of both worlds?

Yes. There is such a thing as a joint venture franchise model. Franchise joint ventures are growing in popularity because it is a model that benefits both the franchisor and the franchisee. The advantages for the franchisor are:

  • They keep more control over their brand and have a driven partner with an invested interest in the success of the business, as they will have contributed financially.
  • They only need to invest 51 percent of the start-up capital into the new venture, as the JV partner will contribute the remaining 49 percent.
  • They will receive the upfront fee from the new venture (which is a franchise), as well as the royalty and marketing contribution.
  • They also receive 51 percent of the profits. This is unlike a usual franchise agreement where the franchisor only receives the monthly royalty service fee as payment for the training and support provided.

There are also benefits for the franchisee in this win-win joint venture franchise model:

 

  • They feel comforted by the backing and support of the franchisor.
  • They may not have the funds available to buy the entire business and benefit from the franchisor as a partner rather than an independent investor who doesnít understand the business.
  • They know that if they decide the franchise joint venture is not for them, the franchisor will more than likely be willing to purchase their share of the business.

How do you know when to choose the joint venture franchise model?

Whether youíre considering a franchise joint venture or a more complex master franchise joint venture, the model can only truly work if the partners involved really understand each other's strengths and remain focused on what they are good at. Both parties also need to have a vested interest and a desire to make the franchise joint venture work for the long-term success of the brand. A joint venture franchise model will only be as good as the partner you choose, so select wisely. Make sure you do your research thoroughly, leave nothing to chance and trust your instinct. Once youíve weighed up the pros and cons of a franchise joint venture and decided that itís the right fit for your business, this growing model could result in a lucrative business venture.
 

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