franchising aspects Oct, 04 2010

Whats Better, Franchising Or Joint Venture?

Every business model has its unique identity, plus and minuses. Same goes for franchising and joint venture, the two models of expansion, both of which have their flaws and flaw-less aspects. However, franchising definitely scores over joint venture, as i

By Abha Garyali
Sub Editor
Whats Better, Franchising Or Joint Venture?

Franchising has taken giant leaps with most of the successful business players adopting the franchising business route to expand their business nationally as well as internationally. At the same time, the trend of venturing into a new country or city by joining hands with another company, i.e. through a joint venture, is also not alien. When we compared the two models, we found that franchising was way ahead when it came to expansion, for the reasons given below.

Disadvantages of joint venture

There are substantial disadvantages to a joint venture operation, which are not unique to franchise concepts and relate to such matters as: who has control; what functions are performed by each of the joint venturers; what is to happen should there be a dispute; what will be the dividend policy of the joint venture (one party may be seeking capital appreciation whilst the other may be looking for an income stream) and how will broad/shareholder approval/consent to major decisions be made.

Says Major KV Rajan, Executive Director, Amoha Education (P) Ltd (Vita), “Joint venture model can be adopted in manufacturing businesses but in education, retail outlets, etc, franchising is the best way to expand business. The franchisees know the local details of any location and can be taught the franchisor’s way of doing business. This cannot be shared in joint ventures.”

Says Sam Chopra, Director, RE/MAX India, "Franchising offers standard set procedures for all the franchisees which helps in optimising the potential, which is absent in the joint venture model. Moreover in joint ventures, there is always more possibility of fall outs and conflicts. Decisions are delayed due to the inability of the partners to come to a decision regarding every small and big issue. Besides, the model of joint venture depends upon case to case. In certain cases, it can be preferred but franchising is always a preferred model to expand.”

Then there are other drawbacks as listed below.

Lack of control: In a joint venture, both the partners are well-experienced. One partner may consider himself more knowledgeable than the parent company. Therefore, he may run the business his way without taking advice of the owner of the company. On the other hand, a franchisee is obligated to follow the rules by contract and he takes each step in accordance with the franchisor. Says Rajan,“There can be a show of dominance by either member in the partnership, which can give bitter results.”

Hindrance in decision-making: Since both the partners are well experienced, in certain cases, it might lead to unresolved issues of dominance in the business. This may lead to wrong decisions by both the partners.

More disputes: A joint venture model can add to more disputes between the partners. The parent company may not prefer the other partner’s way of conducting the business. The latter may employ relatives and friends, who according to the owner of the business, may not have the necessary qualifications and experience.  This may lead to disputes in the long run.

Problem in defining and tracking profits: The absence of fee structure may lead to a lot of problems. Since both the partners share profits and equities, it may lead to unequal distribution, as sometimes the operating partner may feel that he deserves higher profits than the other partner, who “did not work hard.” Moreover, profit sharing among the partners may also lead to bitterness and problems, which do not crop up in the franchise model.

Main advantage is that a joint venture does enable a foreign franchisor to tap into local knowledge and, perhaps, local funding whilst retaining control or involvement in the operation and taking a larger share of the profits than would be the case in a “pure” master franchise or development agreement. Often franchisors strengthen their position by requiring the joint venture company to enter into a master franchise agreement, and possibly also a trade mark licence, in respect of the trade mark to be used in the franchise business.

Secondly, the joint venture partner is an experienced businessman and therefore, needs less training to run the business. This expertise is rarely found among franchisees, who are mostly novices and need the support of the franchisor.

Going by the above pros and cons, franchising surely has an upper hand over a joint venture.

Related: Advantages of taking up a Franchise

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