The Differences between a Chain Store and a Franchise

Most successful businesses and corporations can offer franchising opportunities to willing and qualified investors. When a company sells ... ByIndustry AutomotiveFranchises BeautyFranchises BeveragesFranchises BusinessOpportunities BusinessServices ChildrenRelated CleaningFranchises Computer&Internet EarthFriendly EducationFranchises FinancialServices FoodFranchise Health&Fitness HomeRelated LowInvestment Master/AreaDevelopers MinorityFocused PetRelated PrintingPacking&Shipping RetailFranchises SBAApproved SeniorServices SportsandRecreation TravelFranchises ViewAll ByCategory WorkFromHome Women'sFranchises VeteransFranchises InternationalFranchises InvestmentCost Under$50,000 $50,000-$100,000 $100,000-$200,000 Over$200,000 Top25Franchises BigOpportunities Directory Articles&News AdvertiseWithUs HomeBlogChainStoreorFranchise?ChainStoreorFranchise? TheDifferencesbetweenaChainStoreandaFranchise ByKellyMangum February5,2019 Whiletheterms“chainstore”and“franchise”areusuallyusedinterchangeably,there’sawholelotofdifferencebetweenthetwo.Infact,ifyoudon’tknowthedifferencewheninvesting,itcancostyoudearly.Let’stakealookatthedifferencesbetweenafranchiseandachainstore,shallwe? ChainStoreorFranchise? What’saChainStore? Inthebusinessworld,achainmeansagroupofstores(typicallytwoormore).Theypossessthesamename(brand),andadheretosimilarcorporatestorepolicies,sellthesameproducts,andoftenownedbythesameparentcompany.Here,thinkofWal-Martasachainofmass-retailsupermarkets.Theycanbelocal,regional,nationwideorglobaldependingonthereachofthebrand. Chainstoresarecorporateowned,meaningthattheparentcompanyownsandoperatesalloftheunits.Moreover,alltheprofitsorlossesmadebytheunits/chainstoresareassumedbytheparentcorporation.Infact,theyrundailyoperations,hireemployees,anddoeverythingfromplanningtotax. What’saFranchise? Mostsuccessfulbusinessesandcorporationscanofferfranchisingopportunitiestowillingandqualifiedinvestors.Whenacompanysellsfranchisesit’scalledafranchisechain.Inthatcase,afranchiselocationisownedandoperatedbyanoutsideowner(franchisee).Franchiseesmustpayasmallroyaltyfee(usuallymonthlyorannually)andongoingfeestothefranchisor,aswellasfollowthebusinessprotocolandcorporatepoliciessetbythefranchisecompany. TheguidelinesthatthefranchiseesmustadheretoareclearlyspelledoutinafranchiseagreementdocumentcalledFDD.Eachandeveryfranchiselocationmuststicktotheseguidelinesunlessindicatedotherwisebythefranchisor.Theseguidelinesincludeoperatingprocedures,openinghours,productsallowedtobesold,andhow&whenpricingcanbechanged. Afranchisebusinessstructureisawin-winforbothparties:thefranchisorandthefranchisee(unitowner).Ontheonehand,franchisingoffercorporationsachancetoexpandtheirreach.Italsoallowsotherstoemulatetheirsuccessful,time-testedbusinessmodel,brand,andmarketingreach. Ontheotherhand,franchiseesdon’thavetostartthebusinessfromscratch.It’sbeenalreadydonebythefranchisorandtestbytimeandtheendusers.Inessence,thefranchiseewillgetabusinessthathasbeenproven,andtheadvantageofthemarketingandbrandingpowerofthefranchisor. TheDifference Achainstoreandafranchisearefundamentallydifferent: TheOwnership Chainstoresarefullyownedandmanagedbytheparentcorporationonbehalfoftheshareholders.Afranchiseunit,onitsside,isownedbyafranchisee(anoutsideinvestor).Thatdoesn’tmeanthatacorporationcannothavefranchisesandcorporate-ownedchains.Infact,franchisecompanieslikeMcDonald’shavefranchise-ownedstoresandcorporate-ownedrestaurantswithintheirnetwork.Attheendoftheday,bothfranchisesandcompany-ownedchainstoresmustfollowsimilarguidelinesandcorporatepolicies. Risk Oneofthefundamentaldisparitiesbetweenachainstoreandafranchiseisthelevelofriskinvolved.Acompanythatgoesdownthefranchisingroadwillpassonsomeoftherisksontothefranchisees. Financing Gettingfundstofinancegrowthisthebiggestincentivethatdrivescompaniestosellfranchises.Companiesthatgowithachainstoremodelwillhavetofindfinancingelsewhereperhapsfromthetop-tierlendersorreinvestingprofits. Franchises,however,gotofranchiseestohelpraisefundstodefraycostsofrunningboththecorporationexpensesandfranchises.Withrunningabusinesslocationbeingcapital-intensive,franchisesaremorelikelytoexperiencefastergrowththanchainstores.Thisissolelybecauseoffinancing. CostsofOperations(Overheads) Afranchise-ownedstoretypicallyhasfeweroverheadsandfewercostsofoperationsthanasimilarchainstore.Forone,thefranchiseecanactasthemanagerandtakecareofcostlyexpenseslikeserving,cleaning,etc.Mostchainstores,ontheflip-side,havelargerpayrolls. Profitability Achainstorehasapotentialtoreturnmoreprofitstotheparentcompanyinthelongrunbecauseownership.Specifically,profits(andlosses),andoperationsstaywiththecorporation.Whenitcomestofranchises,thefranchisorhastosharethespoilswiththefranchisee. AbouttheAuthor-KellyMangum KellyMangumistheDirectorofMarketingatFranchise.comNetworkwithexperiencespanningB2CandB2Bonbothclient-sideandagency-side.Kellyhasgotaproventrackrecorddrivingresultsthroughmarketingcampaigns,teammanagement,andcontinualimprovements.She'safitnessfanaticandlovesspendingtimewithfamilyandfriends. CategorizedUnder:FranchiseInformation TextSearch: Search RecentPosts FranchiseDueDiligenceQuestions WhatAre3ThingsThattheFranchisorOftenProvidestotheFranchisee? StepsinEvaluatingaFranchise ExplainOneBenefittoanEntrepreneurofBuyingaFranchisetoStartaBusiness Whatarethefivebiggestfranchisesintheworld? Categories BeYourOwnBoss FinancingOptions FranchiseExposandConventions FranchiseInformation FranchiseNews FranchiseOwnership FranchiseSalesLeadsTrends Franchisesforsale FranchisingaBusiness HowtoBuyaFranchise NewFranchises Q&A ResearchingFranchises topfranchises TrendsinFranchising Uncategorized WhyBuyaFranchise? WorkfromHome