Whether you’re new to the franchising world or a seasoned professional you might be interested if there is really such thing as a joint venture franchise. Let’s find out.
After you've 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 isn’t the only way that you can enter the entrepreneurial world. A joint venture is a business agreement where at least two parties pool their resources together to accomplish a specific task. A joint venture with a partner you trust can be a better alternative for some business types. But is there a way of combining the two? Is there really such thing as a joint venture franchise? In this article, we look at the definition of a joint venture and answer this question.
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What is a joint venture?
A joint venture is an agreement entered into by two or more business entities for a specific project or other business activity. Usually, the joint venture 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 joint venture contribute towards the running of the company and share in both the profits and the losses, according to the joint venture agreement.
Joint ventures can take on any legal structure, including partnerships and limited liability companies (LLCs). Joint ventures are usually formed for research or production, but they can sometimes have an ongoing purpose too. Large and small companies can combine with a joint venture agreement to take on certain projects and deals.
The main three reasons why companies might form a joint venture is to leverage resources, cut costs and to combine expertise. But where does franchising come into this?
Is there really such thing as a joint venture franchise?
Yes, joint venture franchise models do exist. The name itself is misleading, though. It could suggest that a joint venture and a franchise are the same, documented in one legal contract, a joint venture franchise agreement. However, this perception is problematic. A joint venture franchise really means the granting of a franchise to a joint venture party.
Why would a franchisor want to adopt the joint venture model?
Joint venture franchises are growing in popularity because it is a model that benefits both the franchisor and the franchisee.
Let’s explore some of the reasons why a franchisor would use a joint venture model.
- They can 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’ll 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.
- Also, they’ll 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.
What are the benefits for the franchisee?
There are also advantages for the franchisee in this win-win joint venture franchise model:
- They can feel comforted by the backing and support of the franchisor.
- They may not have the funds available to buy the entire business and will therefore benefit from the franchisor as a partner rather than an independent investor who doesn’t understand the business.
- They can 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 is a joint venture franchise structured?
Regardless of the reasons for using a joint venture franchise model, the structure should always be similar. It is a two-layered relationship between the franchisor and the franchisee.
- The first layer. This is the contractual franchise relationship that we think of with franchising, where the franchisor grants the franchisee the right to operate under the brand name. The franchise agreement outlines the terms and obligations of both parties.
- The second layer. This is the equity relationship, where the franchisor takes an equity stake in the franchise. This is in return for providing something of value to the franchisee, for example, lower initial fees. The terms for this relationship are ruled by the shareholders’ agreement or the joint venture agreement.
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How do you know when to choose the joint venture franchise model?
Whether you’re considering a franchise joint venture or a more complex master franchise joint venture, the model can only truly work if the partners involved 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.
The joint venture franchise model is complex but can be very successful.
Joint venture franchises are formed to realise a range of purposes. The franchisor and franchisee need to have a complete understanding of each other’s short and long term goals. They can then align these with a version of a model that works for them. It’s likely that the more parties involved in the planning and structuring stage of forming the joint venture franchise partnership, the more likely it will bring success long into the future.
If you’ve enjoyed this, why not continue your reading with one of our other franchise articles?
Becky Martin, Point Franchise ©