Franchise and Joint Venture Arrangements – How different are they?

Last Updated at: November 04, 2019
1643

The two common ways for different businesses to work together are Franchise agreement and Joint Venture. In Franchise, it enables to use labels, logos, brand name and trademarks. In Joint Venture, joining hands together in sharing expenses and profits. Though both Franchise and Joint Venture have their benefits, there are some differences in the business arrangements.

Henry Ford, one of the most successful management experts of the last century said, “Coming together is a beginning, keeping together is progress and working together is success”. If we think about it, success in the business world has really been based on partnerships from the very beginning. These partnerships may be of different kinds having several arrangements as to sharing of revenue and losses, decision making, liability etc.

Browse through our articles on servies provided at Vakilsearch, and just let us know if we can help you with your company registration or tax filing or trademark registration.

 

Two of the most common ways different businesses can partner with each other are Joint Venture and Franchise agreements. In this post, we discuss the differences between the two business structures and also identify what they are ideally suited for.

Franchise – Using brand names, labels, and trademarks
In a franchise, the business arrangement is such that it enables you to use products or services that are legally owned by another company. So, McDonald’s being a company headquartered in the United States would spread itself too thin, if it were to go to different locations and set up different companies in every country. Thus, it gives out all its symbols, logos, recipes to a franchise owner, for a consideration, and would then have stores that would be designed in the characteristic red and yellow shades. Franchise arrangements often have an initial payment for setting up and a regular sharing of revenue from sales, as determined by the parties.

Prepare Your Business Plan

Joint Venture – Joining hands to become one
A Joint Venture is an alliance quite akin to a marriage, with people making promises to each other, sharing expenses and fruits of their togetherness. In India, Joint Ventures are especially preferred as the law may not allow a foreign entity to invest in certain sectors or industries. A Joint-venture style of business provides not just the financial cushion owing to a larger pooling of resources but also triggers the psychological perks of knowing that decisions are taken together. It is also likely that in pursuit of self-interests, both parties tend to put in their best, leading to better collective outcomes.
While both Joint Venture and Franchise arrangements have their benefits, by way of sharing costs, risks, and profits and entering new lines of business with a strategic partnership, there are certain differences between these two types of arrangements.

1. Lack of control in franchising
While in a typical Joint Venture agreement, where both parties are equal partners, decisions are taken by unanimously and each party may have a say in steering the future of the company. However, an owner of the franchise would have very limited say, if at all, in the way the top management would take decisions. Very often, the main business brand may not be in the same country and the franchise would be contractually bound to execute plans made by the business owners.

2. Risks involved
The level of risk in Joint Ventures is significantly higher than in a franchise style of business. Since there are few parties to a joint venture, with an agreement to share profits and liabilities in a pre-determined ratio, the parties themselves shoulder substantial risk. However, in a franchise, there is less risk as the brand value and reputation is established, with clear and time-tested sales strategies that the top management may communicate to the franchise owner. Moreover, the franchise owner is only responsible for liabilities that their specific store may undertake, reducing the overall exposure to financial and operational risks.

3. Expertise requirement
In a Joint Venture, the top management, because of the nature and magnitude of decisions required to be taken, would have to be financially and technically sound. While expert business knowledge is always an asset, in case of a franchise arrangement, the owner may not need a great level of expertise, since they may not need to navigate through the risks of setting up and expansion.

4. Entering a new and unknown sector
While both Joint Ventures and Franchise arrangements are popular for entering new markets, franchisees of known brands are likely to be more profitable. For example, a cloth seller with experience in sales and marketing may be able to profit from following a similar pattern of operation while taking a jewellery store franchisee; however, he is likely to face many difficulties if he were to partner with a jewellery store in a joint venture form.

5. Ability to expand and generate returns quickly
A franchisee is ideal for established businesses with fast moving products or services that want to expand rapidly in new locations. However, difficulties may arise if the franchise is sold to inexperienced owners or operational difficulties may arise when the location, size, sales outweigh costs involved. In contrast, Joint Ventures are complex and since they do not have the inherent advantage of drawing on the partner company’s experience, they may require greater investment and longer periods to generate returns.

Some of the differences in the business arrangements between Joint Venture and Franchise are: lacking of control in Franchise, risk involved in higher in Joint Venture, expertise is required in Joint Venture, Franchise are more profitable, Franchise has ability to expand and produce returns quickly. Thus, Joint Venture is complex and requires bigger investments and takes longer time to generate returns.

0

Franchise and Joint Venture Arrangements – How different are they?

1643

The two common ways for different businesses to work together are Franchise agreement and Joint Venture. In Franchise, it enables to use labels, logos, brand name and trademarks. In Joint Venture, joining hands together in sharing expenses and profits. Though both Franchise and Joint Venture have their benefits, there are some differences in the business arrangements.

Henry Ford, one of the most successful management experts of the last century said, “Coming together is a beginning, keeping together is progress and working together is success”. If we think about it, success in the business world has really been based on partnerships from the very beginning. These partnerships may be of different kinds having several arrangements as to sharing of revenue and losses, decision making, liability etc.

Browse through our articles on servies provided at Vakilsearch, and just let us know if we can help you with your company registration or tax filing or trademark registration.

 

Two of the most common ways different businesses can partner with each other are Joint Venture and Franchise agreements. In this post, we discuss the differences between the two business structures and also identify what they are ideally suited for.

Franchise – Using brand names, labels, and trademarks
In a franchise, the business arrangement is such that it enables you to use products or services that are legally owned by another company. So, McDonald’s being a company headquartered in the United States would spread itself too thin, if it were to go to different locations and set up different companies in every country. Thus, it gives out all its symbols, logos, recipes to a franchise owner, for a consideration, and would then have stores that would be designed in the characteristic red and yellow shades. Franchise arrangements often have an initial payment for setting up and a regular sharing of revenue from sales, as determined by the parties.

Prepare Your Business Plan

Joint Venture – Joining hands to become one
A Joint Venture is an alliance quite akin to a marriage, with people making promises to each other, sharing expenses and fruits of their togetherness. In India, Joint Ventures are especially preferred as the law may not allow a foreign entity to invest in certain sectors or industries. A Joint-venture style of business provides not just the financial cushion owing to a larger pooling of resources but also triggers the psychological perks of knowing that decisions are taken together. It is also likely that in pursuit of self-interests, both parties tend to put in their best, leading to better collective outcomes.
While both Joint Venture and Franchise arrangements have their benefits, by way of sharing costs, risks, and profits and entering new lines of business with a strategic partnership, there are certain differences between these two types of arrangements.

1. Lack of control in franchising
While in a typical Joint Venture agreement, where both parties are equal partners, decisions are taken by unanimously and each party may have a say in steering the future of the company. However, an owner of the franchise would have very limited say, if at all, in the way the top management would take decisions. Very often, the main business brand may not be in the same country and the franchise would be contractually bound to execute plans made by the business owners.

2. Risks involved
The level of risk in Joint Ventures is significantly higher than in a franchise style of business. Since there are few parties to a joint venture, with an agreement to share profits and liabilities in a pre-determined ratio, the parties themselves shoulder substantial risk. However, in a franchise, there is less risk as the brand value and reputation is established, with clear and time-tested sales strategies that the top management may communicate to the franchise owner. Moreover, the franchise owner is only responsible for liabilities that their specific store may undertake, reducing the overall exposure to financial and operational risks.

3. Expertise requirement
In a Joint Venture, the top management, because of the nature and magnitude of decisions required to be taken, would have to be financially and technically sound. While expert business knowledge is always an asset, in case of a franchise arrangement, the owner may not need a great level of expertise, since they may not need to navigate through the risks of setting up and expansion.

4. Entering a new and unknown sector
While both Joint Ventures and Franchise arrangements are popular for entering new markets, franchisees of known brands are likely to be more profitable. For example, a cloth seller with experience in sales and marketing may be able to profit from following a similar pattern of operation while taking a jewellery store franchisee; however, he is likely to face many difficulties if he were to partner with a jewellery store in a joint venture form.

5. Ability to expand and generate returns quickly
A franchisee is ideal for established businesses with fast moving products or services that want to expand rapidly in new locations. However, difficulties may arise if the franchise is sold to inexperienced owners or operational difficulties may arise when the location, size, sales outweigh costs involved. In contrast, Joint Ventures are complex and since they do not have the inherent advantage of drawing on the partner company’s experience, they may require greater investment and longer periods to generate returns.

Some of the differences in the business arrangements between Joint Venture and Franchise are: lacking of control in Franchise, risk involved in higher in Joint Venture, expertise is required in Joint Venture, Franchise are more profitable, Franchise has ability to expand and produce returns quickly. Thus, Joint Venture is complex and requires bigger investments and takes longer time to generate returns.

0

FAQs

No FAQs found

Add a Question


No Record Found
SHARE
Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.