Franchise vs joint venture… many people are confused about the differences between the two business models. In this article, we delve deeper to find out exactly how they stack up and compare their pros and cons.
More than 48,600 franchise units are currently in operation in the UK, employing more than 710,000 people. There’s a reason why the franchise model is so popular. Investors benefit from a proven business model, high brand awareness, training programmes and support networks. Above all, franchisees are more likely to see success than entrepreneurs who open independent start-ups. 97 percent of franchises are profitable and over half see an average revenue of more than £250,000.
But franchising isn’t your only option if you want to be your own boss. If the thought of going it alone is too daunting, you could consider starting a joint venture. But what’s the difference between franchising and starting a joint venture? Let’s find out.
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What is a franchise?
Franchises are a great solution for entrepreneurs who want to start their own business but still have the security of a proven business model and recognised brand identity. Those who invest in a franchise get access to a training programme and ongoing support from the franchisor, so they’re fantastic for those who want to join a new industry.
The important point to note here is that when you join a franchise, you then operate under its brand identity; you represent the brand and use its products and strategies. As far as your customers are concerned, they’re just walking into another branch of Subway, Kumon or Cash Converters, for example. This is not the case if you start a joint venture.
For a full definition of the franchise model, click here.
Advantages and disadvantages of franchising
- You can use the franchise’s business model that’s been perfected and proven over a number of years
- You can benefit from the franchise’s brand recognition and existing customer base
- You’ll get expert training and ongoing support to make sure your business runs as profitably as possible
- You often benefit from the franchise’s significant purchasing power, saving money on supplies and inventory
- You are likely to be allocated an exclusive territory, eliminating the possibility of other franchisees setting up branches of the same business nearby
- It is easier to finance a franchise business, as lenders are often willing to lend up to 70 percent of a franchisee’s investment
- This security comes at a cost – you’ll have to pay a franchise fee, as well as royalties and marketing fees, on top of the set-up costs you incur
- The franchisor is ultimately in control of the business model and franchisees get little say in how the company is run
- You must share your performance statistics with the franchisor
- If the franchisor or another franchisee does anything to damage the reputation of the business as a whole, your profits may go down
What is a joint venture?
When starting a joint venture, two or more entrepreneurs pool their businesses’ resources and share the profit between them. The resulting organisation benefits from the expertise and experience of each business. Usually, this is a short-term arrangement, for the purpose of completing a specific project.
Advantages and disadvantages of joint ventures
- You benefit from the resources and expertise your partner(s) bring(s) to the table
- You can split responsibilities and costs with your partner(s)
- You can increase your purchasing power
- You can access new markets and distribution channels
- You can use it flexibly, e.g. form a flexible joint venture for one small part of your business to solve a small, short-term issue
Ultimately, you can grow your business faster than you otherwise could, enabling you to be more productive and generate higher profits.
- You have to share any profits with the other business(es) in the venture
- The businesses that join forces must be able to work together effectively. They should have similar objectives and values and have researched the other business(es) thoroughly to make sure this is the case before confirming the partnership. If this is not the case, the alliance is likely to fail before too long. The businesses should have:
- A clear common aim and be able to communicate it well
- Similar levels of expertise, investment and assets to contribute
- The ability to work together despite different countries’ working cultures and management styles
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Franchise vs joint venture – which should you choose?
If you’re ambitious, self-motivated and determined, you will most likely do equally well with the franchise model and the joint venture model, but what you will get out of each one is quite different. In order to decide which one is right for you, you should consider your current situation and what you want from your business in the future.
Here are the key points:
You should start a franchise if you…
- Like security If you are looking for security from your business venture, your safest bet is to start a franchise unit. This is because the business you invest in will already have established a brand identity, business strategies and a customer base who know and trust it. Of course, the success of any franchise unit depends on the demand for its products or services in your area, so carry out research to make sure that your chosen franchise would be well-received.
- Would like to benefit from training and support Because the success of any franchise is in the best interest of both the franchisor and the franchisee, the former usually provides the latter with a good level of training to ensure that their franchise unit has the best chance of success. The initial training would not only provide you with the knowledge to operate the franchise effectively, but also with a range of other business-related skills in areas like marketing, recruitment and staff management. What’s more, as a franchisee, you should receive ongoing support for the duration of your time with the business, meaning that you always have someone to turn to for advice.
- Are willing to make a long-term commitment Franchises generally involve a long-term commitment. The exact amount of time you must dedicate to a franchise ranges from a couple of years to 25 years, but the average is around five. Of course, if you wish to continue your alliance with the business – and your franchisor is pleased with your input – you can renew your contract. Therefore, a franchise agreement should only be entered into if you are willing to dedicate your time, money and effort to it for the entire duration of the contract.
You should start a joint venture if you…
- Are willing to take a risk A joint venture does not bring with it the same guarantees that a franchise does. It does not necessarily have a tried and tested business model or collection of loyal customers. Although you won’t have to carry this burden solely on your shoulders, as you’ll have another business partner there to share the responsibilities, this is something to think about.
- Have industry experience Because joint ventures tend to involve a greater level of risk, it’s usually necessary to have a deeper understanding of the business and what it takes to run it. Bear this in mind if you’re selecting a potential business partner – if you’re both relatively inexperienced, it could spell disaster for your new venture. On the other hand, if you both have experience in different areas, you can contribute equally to the business and learn from each other’s knowledge.
- Are looking for a short-term solution Joint ventures are typically used to achieve a specific goal over a short period of time. Once the goal has been reached, both parties can decide whether they want to part ways or set another business objective.
Making your decision
As you can see, franchises and joint ventures are very different business models, and choosing the right one will depend on your specific situation and goals for the future. The support provided in the franchise model enables entrepreneurs to get a business up and running within a short timeframe, while a joint venture can be ideal for businesses that can benefit from the expertise of another organisation.
Understanding the pros and cons of each model can help you choose the one that suits your personality, budget and ambitions. Now that you know how the franchise and joint venture models differ, you may be interested to find out about how they can be combined. To read more about joint venture franchises, just click here.
Alice Tuffery, Point Franchise ©