Which are better – franchises or joint ventures?
Originally posted on 29/05/2018. Updated on 11/05/2019.
There is a reason why the franchising business model is so popular. More than 44,000 franchise units are currently in operation in the UK, employing more than 620,000 people. They are familiar with the benefits of the franchise system: brand awareness, a proven business model, training programmes and support networks. Above all, franchises are more likely than independent start-ups to see success – 97 percent of franchises are profitable and over half see an average revenue of more than £250,000 (BFA-NatWest survey).
However, 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 establishing a joint venture. But what does this involve?
What is a joint venture?
This is where 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. But, as with any business move, there are pros and cons to joint ventures that should be considered before you make any decisions.
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Advantages of Joint Ventures
- You gain access to the resources and expertise of your partner(s)
- You can split the responsibilities and costs with your partner(s)
- You can increase your purchasing power
- You can access new markets and distribution channels
- You can form a flexible joint venture for one small part of your business – if you have a small, short-term issue, a joint venture could help with this
Ultimately, you can grow your business faster than you could do otherwise, enabling you to be more productive and generate higher profits.
Disadvantages of Joint Ventures
The main disadvantage is that you have to share any profits with the other businesses in the venture, but the most important thing to remember is that 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 ensure that this is the case before confirming the partnership. If this is not the case, the business is likely to fail before too long anyway. This can happen when:
- There is no clear common aim, or it is communicated poorly.
- There is an inconsistency in the amount of expertise, investment or assets that the partners contribute.
- Businesses from different countries are accustomed to different working cultures and management styles.
Franchises vs Joint Ventures
If you are ambitious, self-motivated and determined, you will most likely do equally well within 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. For example, ask yourself:
Do I want…
…security, or am I willing to take a risk?
Franchises: 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.
Joint ventures: In comparison, 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. While it is true that you won’t have to carry this burden solely on your shoulders, as you will have another business partner there to share the responsibilities, this is something to bear in mind.
…training in unfamiliar elements of the business?
Franchises: 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.
Joint ventures: Because joint ventures tend to involve a greater level of risk, it is 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 are 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 wisdom.
…long-term commitment or a short-term solution?
Franchises: This type of venture generally involves 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 the business 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.
Joint ventures: In contrast, 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.
As you can see, neither franchises nor joint ventures are better overall, but each will suit different situations. The support provided in the franchise model enables entrepreneurs to get a business up and running and generating income within a short time frame, while a joint venture can be ideal for certain types of businesses. Understanding the pros and cons of each model can help you choose the one that suits your personality, budget and ambitions.
Alice Tuffery, Point Franchise ©
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