Alternative business models

If you’ve read our guide to choosing which business model is right for you, you’ll now have good knowledge of the ‘big 4’ business models: sole trader, limited company, (general) partnership, and limited liability partnership.

You’ll also have come across our individual guides on how to set up each of these models.

In addition to these business models, there are other business models that, while not as common a choice as the others, may be worth considering for your business.

Typically, however, these are models that you’re likely to consider later on, generally as a ‘scale-up’ strategy for your existing business, or, in the case of the unincorporated association, as a slightly more niche alternative to one of ‘the big 4’ (since it’s a model that often only works in specific, and more limited circumstances).

We focus here on 4 of those alternative business models:

Franchising

This is where other independent businesses apply to you for your permission to set up and manage a business that aims to replicate your brand – so much so, that customers get the same look, feel and experience in wherever they encounter these other businesses.

A franchise model is a great way to expand your business rapidly, especially if you’re a predominantly bricks and mortar business, or you’re looking for a bricks and mortar presence.

It’s a good approach if you want to minimise a lot of the cost and risk of expansion.

In many ways, it’s like a glorified licensing model, with you (the franchisor), contractually permitting the franchise owner (franchisee) to use your branding, to call themselves by your brand name and to hold themselves out as authorised by you to sell your products and services (or products and services identical to yours) and operate in your name.

There’s generally a lot of IP involved in these kinds of relationship, from permitting the use of your trademarks and copyright all the way through to potentially providing the franchise owner with proprietary recipes and other operational ‘know-how’, to use of patented materials and design rights.

The franchisee remains responsible for their own premises, sales and profits – and accountable to you for trading revenue.

As a franchisor, however, you’ll have the right to impose quite exacting operating criteria and targets on the franchisee as part of the relationship.

In theory, giving you a huge degree of control over how the franchisee can operate.

One of the biggest challenges for franchisees with a franchise model is ensuring quality control and compliance by the franchisee with the franchise obligations, and of course, finding the right franchise partners in the first place.

Good examples of well-known franchises are the Subway sandwich store brand, Pizza Hut, McDonalds, Europcar, the educational business Kumon, and supermarket chain Spar.

To learn more, take a look at our guide to franchising.

You should also check out our Franchising publications – Buying a Franchise and Starting a Franchise

Licensing

Licensing is where one business pays another business for the right to use that business’ intellectual property (e.g. original designs, technology software) to sell to their own customers.

It’s a good way for the licence-owning business (the licensor), to further commercialise a great piece of intellectual property, by getting someone else (the licensee) to take on the heavy work of investing in, creating and selling products or services that are licensed to take advantage of the intellectual property.

Unlike a franchise, the licensee does not take on the identity of the licensor and can sell the licensed products and services under its own trading name.

The licensor also has far less control over the way in which the products or services are sold.

Here’s a link to our guide to licensing, which explains the business model further.

Joint venture

Joint ventures involve two or more companies with different skills joining together to reach a common goal.

And there are many varieties.

Some joint ventures result in the establishment of brand new companies, with the collaborating, original businesses (called ‘parents’) setting detailed rules for the governance of the newly created business, including in relation to how decisions, IP and profits are allocated and who will contribute other resources, like, staff, facilities/premises or equipment.

These types of venture are often formed where the parent businesses envisage lengthy, costly and potentially risky enterprise, such that it makes sense to share risks, expertise and resources, to achieve the desired outcome.

Often, you’ll find these kinds of models in engineering, scientific, mining, technological and pharmaceutical industries, for example.

They can even find themselves subject to M&A and regulatory laws, especially since they often involve competing businesses or those that are closely aligned in a vertical supply chain (e.g. where a producer and a distributor work together).

Simpler versions of joint ventures are generally more about shorter collaborations, requiring a lesser degree of involvement by the parent businesses and not necessitating the creation of permanent business structures.

This might be in order to create and host events, to write a book, conduct a finite R&D project or to launch a range of designer products and services, for example.

A lot of the time, these collaborations will not involve rival businesses, but there’s no rule that says they can’t.

Read more in our guide to the joint venture business model.

Unincorporated associations

This is an alternative model where two or more individuals create an association, like a club or a collective. e.g. a charity, a cycling club or a not-for-profit organisation, like some types of a trade association.

These tend to be looser business models, where there are often rules and some kind of governance, but they’re less formal and involved.

There are advantages, as well as things to look out for, with this type of model, especially when it comes to who has liability for the activities of the organisation, how it can be funded, and who carries risk or can own property or assets on behalf of it.