This article is written by Rishabh Sen Gupta who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Table of Contents
Introduction
Joint venture agreements are agreements when two or more entities reach a mutual understanding with one another for some specific purpose and the same is terminated after fulfilment of the same whereas, a franchise is a business agreement in which one party enters into an agreement with a company to offer goods or services under the company’s name and image. Although both are lucrative means of earning profits and accumulating returns, this article considers the key differences between the two and what factors should be kept in mind while opting for either of them and legal implications that may arise from the same.
Origin and History of Joint Venture and Franchises
The joint venture originated as a commercial or maritime enterprise for trading purposes. It was used as a commercial device by merchants and businessmen of ancient Egypt, Babylonia, and Syria to conduct sizable overseas trading operations. Thereafter, they began to be used by merchants in Great Britain four to five centuries before and the Dutch soon followed. However, the concept of a joint venture as a purely legal relationship is of American dating back to the late 19th Century where it was finally determined by the Supreme Court of Michigan in the case of Hathaway v. Porter Royalty Pool that;
“It can be said that a joint adventure contemplates an enterprise jointly undertaken; that it is an association of such joint undertakers to carry out a single project for profit; that the profits are to be shared, as well as the losses, though the liability of a joint adventurer for a proportionate part of the losses or expenditures of the joint enterprise may be affected by the terms of the contract….There must be a contribution by the parties to a common undertaking to constitute a joint adventure… and a community of interest as well as some control over the subject matter or property right of the contract…Whether the parties to a particular contract have thereby created, as between themselves, the relation of joint adventurers or some other relation depends upon their actual intention, . . . and such relationship arises only when they intend to associate themselves as such. This intention is to be determined in accordance with the ordinary rules governing the interpretation and construction of the contracts.”
Franchises on the other hand trace their origins to the Middle Ages when feudal lords had initiated the practice of bequeathing to others the right to collect taxes and operate markets on their behalf. Franchising as a way of doing business can trace its roots to the mid-nineteenth century when German brewers set up contracts with tavern owners to sell beers exclusively in the taverns.
In the United States, franchising was seen in the form of sale of products to housewives. In 1851, Isaac Singer became the first American product name franchisor when he started to sell the rights of sewing machines to independent sales persons so that they could sell the same to end users. Although it was the earliest product franchisor, it was soon outpaced by Coca-Cola in the 1890’s which chose to franchise the rights of carbonated beverages to a large number of independent businessmen who were authorised to distribute the product in exclusive territories.
The same was followed by the franchising of car dealerships in the form of Ford and General Motors to independent businesses and same also became popular among food chains such as Taste-Freez, KFC, Mcdonalds and Burger King by the 1950’s.
Later, franchise control began in the 1970s as a result of the loss of many people’s investments in these franchises. The first franchise bribery probes were launched by the Federal Trade Commission (FTC) in 1975. The North American Securities Administration published draft rules for Uniform Franchise Offering Circulars (UFOCs) in the same year, which have since become the standard method for reporting franchise opportunities to franchisees in the States.
Key Differences between joint venture and franchising agreements
High levels of self determination
One of the most significant differences between a joint venture and a franchise in is that a joint venture usually has more self-determination than a franchise. Joint projects open up a whole new market for goods and services. Until the agreed-upon terms of sale say otherwise, joint projects are not obliged to meet the member firms’ guidelines and regulations. A franchise, on the other hand, must adhere to the franchisor’s strategy and regulations, especially in food franchises, where all franchises around the world sell similar menu items and services.
Degree of training and professional development offered
Employees in a joint venture have their own range of training activities and career development opportunities. Neither of the joint venture partners is obligated to educate the staff of the other. In a franchise form of business, on the other hand, the franchisor is responsible for providing training and guidelines to their franchises.
Risks associated while conducting both forms of businesses
If a joint venture fails to meet goals and underperforms the industry, it is called a risky investment. As opposed to a franchise, joint ventures bear a higher level of market risk. Franchises, on the other hand, operate under a tried-and-true corporate model that will continue to be a franchise success.
If you join a leading coffee franchise company, for example, the franchisor would supply you with the business model and logos that made the original brand successful. In contrast to a joint venture, a franchise is a less costly investment. People tend to invest in low-cost franchises as their first option for investment due to the lower risk involved.
Ability to expand and generate returns quickly
A franchisee is suitable for existing companies that have high-demand goods or services and wish to grow quickly into new markets. However, problems can occur if the franchise is sold to novice buyers, or where the cost related to venue, scale, and sales outweigh the profits earned. Joint Ventures, on the other hand, are more complicated, because since they don’t benefit from the partner company’s expertise, they can need more effort and take longer to pay off.
Other distinctions in Joint Venture and Franchise market agreements include: loss of control in the case of Franchise agreements, greater risk in Joint Venture, greater experience level needed to establish a Joint Venture, Franchise is more lucrative, Franchise has the potential to extend and deliver returns faster. As a result, joint ventures are more complicated, necessitate larger costs, and take longer to earn returns. Although joint ventures and franchise agreements are both common ways to break into new markets, franchisees with well-known brands are likely to be more successful.
Level of expertise required
Because of the scope and magnitude of the decisions that must be made in a Joint Venture, the top management must be financially and professionally sound. Although expertise in the business is always desirable, in the case of a franchise, the owner does not need too much skill because they may not be navigating the risks of start-up and growth.
Legal implications of a joint venture or franchise agreement as per Indian context
As per the provisions of the Companies Act, 2013, a joint venture is defined as a joint arrangement, whereby the parties that have joint control of the arrangement have the rights to its net assets. Although there is no clear legislation that governs franchise agreements and their various provisions, such as dissolution, non-disclosure, and other terms. This isn’t to say that franchising in India is unregulated the franchise business model has carved its exemplifying basis in India through numerous enactments.
Both these forms of agreements are governed by various provisions of laws some of them being the Contract Act, Partnership Act, Competition Act, Income Tax Act, The Foreign Exchange Management Act, etc.
Conclusion
Both joint venture and franchise agreements are very famous business forms. Before opting for either, enterprises or persons should always be mindful about the purpose they are being undertaken for.
As already mentioned, the level of self-determination in question, the risks associated with carrying out each business form and ability to generate returns quickly are some of the factors that should be taken into account before entering into the same. If the same is done the parties will be able to carry on whatever they are traversing into more successfully.
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