Which is better? Franchising or a joint venture

29/05/2018 17:00 | Start a business

Franchising or a joint venture? Which is best?

The benefits of the franchise business model are well-versed. In return for a franchise investment, franchisees gain from being part of an established and recognisable brand, as well as a tried and tested system with a proven track record of success. Combine these advantages with the training and support that the model provides, and you can understand why over 44,000 budding entrepreneurs in the UK have chosen this route to business ownership.

But franchising isnt the only way to become your own boss. If the thought of going it alone is too daunting, you could consider establishing a joint venture.

What is a joint venture?

A joint venture is when two or more businesses pool their resources and expertise together for mutual profit. As well as sharing the profits, each business owner also shares the risks and rewards.

The advantage of starting a joint venture is that you have a greater capacity to bring a new product or service to market via established distribution channels. But, just as with any business decision, there are pros and cons which must be considered before you choose to invest.

Advantages of a joint venture

A huge benefit of a joint venture is that you can grow your business faster than you could alone, you can be more productive and, therefore, generate increased profits. Other advantages include:

  • access to new markets and distribution channels
  • improved capacity
  • splitting the responsibilities and costs with your partner
  • use of combined resources and expertise
  • join forces to increase your purchasing power.

A joint venture can also offer a flexible solution to a short-term problem. If you decide that you need help with one particular part of your business, you can form a joint venture just for this element.

Disadvantages of a joint venture

Of course, with the benefits come the risks. Partnering with another business can be complicated particularly if you choose the wrong business to join up with. If the business relationship is an unsuccessful one, the disadvantages can include:

  • no clear common goal between the businesses or its communicated poorly
  • a mismatch in the level of expertise, investment or assets that each partner contributes to the business
  • when businesses from different countries join up, the different cultures and management styles can result in a poor working relationship being established.

For a joint venture to succeed, there needs to be a clear alignment of aims and objectives which can only be guaranteed through thorough research and analysis before the partnership is confirmed.

Franchising versus a joint venture

The most successful franchises are owned and operated by ambitious, dedicated and determined entrepreneurs. These are also the traits that are required for a partner in a joint venture relationship. Only after considering both the franchise business model and the joint venture option, can you truly decide which is the best option for you?

Here are some differences between the two business types which may help you decide.

Security vs Risk

A franchise investment is generally considered to be less of a risk than a joint venture because the business is already established. If you perform thorough due diligence before you sign the franchise agreement, youll have an understanding of whether there is an appetite for the franchise within your area.

However, much of the nervousness that many new business owners feel when they open their doors is limited because you'll already have a ready-made customer base to a certain extent. Your prospective customers are likely to have an awareness of the brand already and have an expectation about the quality of the products and services they'll receive.

A joint venture in comparison involves more risks because you and your partner may be introducing a new product or service to a previously untried location or population. You dont get the same security that the most successful franchises get to enjoy. However, what you do benefit from is being in business with one or more partners. You dont have to carry the burden of the joint venture solely on your shoulders. Having partners to share the responsibilities with can be extremely comforting.

Inexperience vs expertise

The franchise business model provides the perfect training ground for inexperienced entrepreneurs with the skills needed to become successful business owners. The initial training that the franchisor offers will not only provide you with all the know-how to operate the franchise effectively but also provides you with a wealth of business-related skills in areas such as marketing, operations, recruitment and staff management.

However, because a joint venture tends to involve greater risk, a deeper understanding and experience of owning a business may be required. As youll be joining forces with a partner, its best to find one that has a similar level of expertise as you so that you can equally contribute to the joint venture. If you're both similarly inexperienced, it could spell disaster for your new venture.

Long-term commitment vs short-term solution

Franchise agreements can last anywhere from a couple of years to 25 years. The average franchise term is five years, and the franchise contract is usually up for renewal providing you've proven yourself to be one of the most successful franchises. For this reason, a franchise investment should only be made if youre committed to developing your business with your chosen franchise brand.

This differs from a joint venture which typically lasts for a shorter set period to achieve a specific objective. Once the agreed goal has been reached, both parties can decide if they want to part ways or set another business objective. There is no legal requirement for the joint venture to continue if both parties are happy to go their separate ways.

In conclusion, the answer to the question which is better, franchising or a joint venture? will be different for everyone. Franchises offer support to get a business up and running with an almost immediate income. Whereas, a joint venture with a partner you trust can work better for certain types of businesses. Understanding the pros and cons of each model can help you choose the working relationship that suits your personality, budget and ambitions.

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