Your business may be small now. But if you reach the point of considering future expansion, you’ll have to make crucial decisions for your business to grow. Some of those decisions include the type of business entity, trademarking your business name, and ownership, to name a few.
Another important decision as a business owner is whether your company should own all the units or whether you will allow other investors to buy some of them. Whichever decision you make, it means that your business will become either a franchise or a chain.
When it comes to major brands such as McDonald’s, Starbucks, Burger King, etc., the terms chain and franchise are sometimes used interchangeably. However, the difference between a franchise and a chain is apparent.
This article will walk you through the differences between these two terms and show you the benefits and disadvantages of each of these business models.
Table of Contents
- What is a franchise?
- What are the key points to take into account before investing in a franchise system?
- What is the role of the franchisee?
- The advantages of franchising
- The disadvantages of franchising
- What is a chain?
- What are the advantages of a chain?
- What are the disadvantages of a chain?
- Key differences between franchises and chains
- Franchises vs. chains: Final takeaway
What Is a Franchise?
Franchising is a business arrangement in which a company (franchisor) grants the right to undertake the business of marketing and selling products or providing services to an individual or group of individuals using the franchisor’s business model. Some examples are Ace Hardware Stores and coffee franchise Dunkin’ Donuts.
The business model, logo, and company name are among the rights sold in this type of business. In most cases, the franchisor requires that the business model and the pricing, business methods, and other specified factors of pricing remain the same.
Before signing a contract and benefiting from the intellectual property of a franchise, the franchisee must pay an initial sum that covers the rights of the company, and, once the business is launched, the franchisor receives a royalty fee.
The royalty fee paid to the franchisor is calculated based on a percentage of the sales made. It can be paid on a monthly, quarterly, or annual basis, depending on the conditions established when signing the contract.
As a retail or SMB owner who wants to invest in a franchise, you must ensure that the franchise offers the following advantages.
- The franchise is a well-recognized company and is not controversial
- The products and services offered by the company are of good quality
- The company is able and willing to provide training to your management team
- The franchise provides you with initial and ongoing marketing and advertising strategies
- It offers ongoing general support
The franchisee is, in a way, the ambassador of the franchisor. Therefore, the franchisee is required to act in a manner that the reputation of the franchisor is not tarnished.
The franchisee must also respect the business model set up by the franchisor and maintain consistency in the state of operations in all the commercial sites under the brand.
The franchisee is also required to respect the agreements signed with the franchisor regarding implementing the brand’s logo, signs, and other distinctive features.
Franchisees benefit from the marketing undertaken by the franchisor. However, if a franchisee wishes to conduct its own marketing campaign, it must first inform the franchisor, who will give its agreement and the means to be used to do so.
- You benefit from the reputation of the franchisor from the moment you open your business
- You reduce your workload by learning from the experience and knowledge of the franchisor
- Assistance in getting the business operational
- Continuous support in advertising, marketing campaigns, and equipment purchases
- Technical, legal, and commercial assistance
- Speed of growth
- Long term commitment
- An improvement of operational quality
- Support for costs of research market
- Reduces the risk of failure for the entrepreneur
While being a franchisee has its advantages, there are also disadvantages that you should expect. Here are some of those disadvantages:
- The process can take quite some time and be tedious
- If the franchisor encounters financial difficulties, these can have severe repercussions for the franchisee
- The fees paid to the franchisor in terms of royalties can also be high
- The requirements imposed by the franchisor can be quite stringent
- Loss of complete brand control
- Strict compliance with product regulations
- Inability to innovate properly
A chain refers to a series of retail outlets in different geographical areas owned by a single company, offering the same products and services. A chain store is one such retail outlet. It aims to dominate the relevant industry, and thus, they are spread across the country or the world.
Chain stores can range from supermarkets to restaurants to multiple stores. Chain stores are a group of similarly branded retail stores owned and operated under a single central management. It represents a network of branches located and operated in different parts of the country. In addition, the markets with which they compete are primarily local markets.
Here are some of the advantages of a chain:
- A chain retains all ownership rights
- An unprofitable branch can be closed and moved to another location
- Chains own all the profits from other stores because there are no middlemen
- Lower cost of distribution
- Affordable product prices for customers
- Uniform pricing of products
- Quick return on investment
- Availability of common items
- Easy and quick management
- Significant capital needs
- Challenging to have control over all chains
- Low availability of loan facilities
- The company bears all losses in the event of bankruptcy because no risk is transferred to the investors
- Lack of personal services
- Significant losses if demand changes
- High operational costs
The difference between a franchise and a chain can be established for the following reasons:
1 – A chain store refers to a retail establishment owned and operated by a company and follows standardized business methods and practices. On the other hand, the franchise is a form of business owned and operated by an individual. However, it is branded and managed by the original corporation.
2 – The franchise depends on the relationship between the brand owner and the affiliated retailer, the local operator. On the other hand, a chain store is represented by a network of different physical outlets, regardless of their location.
3 – In a franchise, the franchisee owns and operates the store. However, all business units in the chain are owned and operated by the parent company.
4 -The franchisor shifts a reasonable amount of risk to the franchisee, whereas all risk is shouldered by the owner in the case of a chain.
5 – In the case of a franchise, the profit/loss is shared between the franchisor and the franchisee. However, whatever profit or loss the store makes belongs to the parent company.
6 – The employees of a franchise are recruited by the franchisee, under the guidance and direction of the franchisor. However, the recruitment and training of the chain store’s employees are handled by the parent company.
7 – The franchisor does not have complete control over the business and its operations. Conversely, the parent company has full control over the business and operations of the chain stores.
8 – In the case of a franchise, expenses are shared by both the franchisor and the franchisee, whereas in a chain, costs are incurred by the parent company only.
Managing franchises or chains of stores is not an easy feat, mainly when they are located in different cities and states. With the right management software, franchisors and chains can effectively manage multiple stores and locations in real-time. Finding the right multi-store retail management software like KORONA POS is critical because it bridges franchisors, franchisees, and other retail chains.
KORONA POS is a point-of-sale system that provides actionable reports and analysis and helps optimize inventory control. It helps increase sales, track lead sources, automate workflow, transparently report on revenue, cash flow, profits, losses and expenses, and many more. Try KORONA POS for free now to see how it works.
Most companies around the world use franchising and chaining as a growth strategy to increase distribution. Choosing between franchising and chaining involves considering the allocation of risk, the costs associated with starting a new business, maintaining full ownership of the company, and the means to grow the business. Both are ideal business models depending on the preference of the company owner.
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