Franchise Vs. Joint Venture

A franchise is a business arrangement in which one party signs a contract with a firm to sell products or services using the firm's name and image. A joint venture Is an agreement between two parties to work together for mutual profit, typically by bringing a new product or service to a market. Both have potential benefits and setbacks.

Partners in joint ventures have a higher level of self-determination than franchise owners. They pinpoint the market demand for a new product or service. Then they typically combine the stability of an established company with the novel offerings of a company new to the location. Foreign and domestic firms often partner in joint ventures to market novel producs -- or those new to a given market -- under a reliable name. Joint ventures may appeal more to creative individuals than franchises would, because of the level of self-determination they involve. Franchise owners, meanwhile, must typically follow the plan and market the products or services of a particular company. Fast-food restaurants have franchises across the U.S. that sell the same products.

A franchise typically involves less risk than a joint venture, because customers already know and trust the company's image and products. However, if the company is new, in a quickly changing field or trying to sell many franchises, it could be in financial trouble. A prospective franchise owner can study how well franchises perform in nearby locations or in populations with similar demographics. Furthermore, the owner does not necessarily need the same level of financial expertise as the partners in a joint venture. The franchise comes with a clear plan and support from an established company that invests in the franchise's success to maintain its own success. A joint venture, meanwhile, may involve more risk because the partners introduce a new concept that may not succeed in a given population or location. However, the two parties share the risk by each investing their own assets, which can reduce the burden of the risk on both parties.

Entrepreneurs might develop their business skills through a franchise, using the franchise as a training grounds for learning how to manage a business. They should look for a franchise in the same industry in which they wish to specialize, to build their knowledge in that area. In the process, they might keep a record of creative ideas for a future business. Because a joint venture tends to involve greater risk, the parties involved should have more advanced financial expertise in order to determine what risks they should take.

A franchise agreement can last indefinitely, but a joint venture typically lasts for a set period of time. When the time period ends, both parties might consider whether they wish to continue the venture or begin a new one. Furthermore, a franchise includes an entire functioning business, whereas a joint venture focuses on a specific product or service, or a narrow group of them. An existing business could benefit from a joint venture, while a franchise begins a new business.