The greatest management expert of the last century, Henry Ford, said, 'Coming together is a beginning, keeping together is progress and working together is success'. When we think about it, success in the business world has always been based on partnerships, and that has been the case since the very beginning of the world of business. A partnership may consist of a variety of arrangements regarding the sharing of revenue and losses, decision making, liability, and so forth. Two of the most common ways for businesses to partner 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.
Differences Between Franchising and Joint Venture
Indian Oil Corp and French oil company Total set up an equal joint venture for the Indian road-building sector to produce and sell bitumen derivatives and specialty goods.
The two common ways for different businesses to work together are Franchise agreements and Joint ventures. In Franchise, it enables the use of 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.
In this blog, we’ll learn about the differences between Franchising and Joint Venture.
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, and recipes to a franchise owner, for consideration, and would then have stores that would be designed in the characteristic red and yellow shades. Franchise agreement often have an initial payment for setting up and a regular sharing of revenue from sales, as determined by the parties.
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, and 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.
Differences Between Franchise and Joint Venture Agreement
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 Franchising and Joint Venture. Below mentioned are few differences between Franchising and Joint Venture
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Lack of Control in Franchising
While in a typical Joint Venture agreement, where both parties are equal partners, decisions are taken unanimously and each party may have a say in steering the future of the company. However, an owner of the franchise would have a 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.
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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 the 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.
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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 the 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 expanding.
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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.
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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, and 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.
Conclusion – Differences Between Franchising and Joint Venture
So, here are some of the differences between Franchising and Joint ventures: Franchises lack control, Joint Ventures involve risk, expertise is required, Franchises are more profitable, and Franchises have the ability to expand quickly and produce returns. Thus, Joint Ventures are complex, require bigger investments, and take longer to generate returns.
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