Two of the best ways to expand a brand, especially for retail brands, are either through franchise or chain business models.
Both of these ways are extremely effective ways to spread your brand’s name and increase your market share.
However, they are two different types of business models, and they have important differences that you should be aware of.
If you are interested in expanding your business and increasing your market share, you might be thinking about either of these options.
You might also be thinking of buying a business but don’t know which of these business models is purchasable.
This article will explain both of these business models and show you the differences between them to help you with your decision.
Chain businesses are a type of business with multiple locations that are owned and operated by one company.
All of the locations of this company have the same name and sell the same goods, and the company that owns it also runs the location.
They have full responsibility for the losses, take the profits from each location, and manage all other operational needs of the location.
For a business to qualify as a chain, the company must have more than one location.
There are usually smaller chains that operate in a small region, in a few cities, or just in one city but with at least two locations.
Larger chains could serve a whole region, city, state, or even multiple countries at the same time.
There is not really a specific set of industries for chain business models. Supermarkets, bookstores, jewelry stores, drugstores, and almost all retail companies can be chains.
Benefits of a Chain
A chain business model comes with various benefits. Depending on your risk tolerance and goals, these benefits might be what you are looking for and help you make a decision.
Here are some of those benefits:
- Ability to buy large volumes of goods for all of the locations and then use volume pricing.
- Easier to advertise all of the locations.
- Many opportunities to experiment with your structural changes and see the results.
Franchise businesses are a different type of business model than chains that allow individuals to buy the rights to the franchise’s brand name and open stores under this name.
These individuals who buy these rights open and run locations with the main company’s brand name and sell the products or services of the main company.
Franchise businesses either have all of their locations through a franchisee, or they keep a healthy balance between company-owned and franchisee-owned stores.
Franchising helps a company to expand way faster than expanding on its own to many different geographies.
It is the result of the main company being willing to sell the brand’s use of rights to those that want to use their name.
This also gives the opportunity to entrepreneurs to run an established business.
Franchise agreements change from company to company, but they generally wander around the same characteristics.
The first step to starting a franchise is to pay a franchise fee to the franchisor to buy the rights to its trademark. Other costs depend on many different factors and are not mostly set.
Benefits of a Franchise
A franchise model also comes with its benefits. Depending on your goals, they might be a good or bad thing.
Here are some of them:
- Easier to succeed as an individual entrepreneur wanting to start a business.
- No stress on trying to find a working business model, as you receive one that is already proven to be working.
- You have the support of the main company behind you.
Structure of Ownership
One of the biggest differences is that in a chain, each location belongs to the main company.
The main company hires employees, manages day-to-day operations, makes business decisions, and takes on all the profit as the sole owner.
In a franchise, however, each franchised location has a different owner that is not related to the company.
This owner makes all the major business decisions, hires employees, and manages the daily operations.
After paying all the necessary fees to the franchisor, the owner of the location also keeps all the profits to themselves.
Though, the owner has to stick to the franchise agreement and manage it in the agreed style.
You are going to need financing both for franchise and chain, but how you get that money is very different in the two of these business models. For companies that use a chain structure, the money is the company’s own money.
It comes from the parent company’s profit and lending institutions. There is no one else that the company relies on to find the financing for the new locations.
For franchises, however, the company doesn’t pay anything. The franchisor is obligated to pay these fees.
The franchisor also pays an extra fee to the company to buy the trademark for its location. Later on, the franchisor takes responsibility for every kind of cost, such as the startup costs.
Profit and Loss Allocation
Similar to the situation in the financing, the way how the profits are shared is also very different. In the chain business model, the locations are company owned and operated by the company.
This means that all the profits go to the main company. If the location loses money, the main company also has to acknowledge that and take the loss.
In a franchise, the franchisor receives corporate support and uses the parent company’s trademark.
This means that the main company has legal rights to the profits but not to all.
According to the franchise agreement, the main company receives a certain percentage of the profits, and the rest stays with the franchisor.
Whether it’s a chain or franchise business model, the risks are always there, but who takes responsibility for the risk changes based on the models?
In the chain business model, the main company assumes all the risks, and it affects the main company’s performance.
In a franchise, both parties share the risk. Franchisor makes some resource investment towards the store, but most of the operational risk is on the back of the franchisee. It doesn’t affect the company’s performance as much as it does in the chain model.
In the chain business model, the company owns the location and handles everything, including daily operations.
This is not the case in franchises, and this affects the consistency between stores in the franchise model.
Even though franchise business models also try to get consistency as much as possible by giving the franchisee all the necessary resources, it might still not be enough all the time.
Control of the Business
As we mentioned before, a chain business model works on opening your own locations and spending your own money, taking your own risk.
This means each location the company owns essentially belongs to the company. That way, the company doesn’t give out control of the main business, keeping all its shares.
In the franchise model, this is not the case, as the main company can’t take part in the daily operations of the businesses in every detail.
The franchisee owns the land and the trademark, and unless the franchisee does something that is not in accordance with the agreement, the main company doesn’t have as much say in the control of the location.
All in all, there are generally two business models most retail and commerce businesses follow, which are franchise and chain. Though they seem quite similar, they are actually very different in essence.
A chain is a model where the company owns all the locations, and a franchise is where the company gives the brand’s trademark to franchisees for them to operate.
The main differences between these two models are how you get the financing for each location, who takes risks, control of the business, consistency, and profit allocation.
Franchises are great models for entrepreneurs looking to open their own locations without much risk.
Chains are only for those who want to create something from scratch and build that on while keeping all the control.
Is every chain also a franchise?
No. Almost all chains are operated by the brand, and they hire their employees and manage the business on their own.
A franchise is also a chain, but not all chains are franchises. Franchises give the right to franchisees for them to run the business.
How do you know which company is a franchise and which is the chain?
You can generally find this kind of information in the company’s financials or whether they franchise any location.
If a company is open to franchising, this means they are a franchise, but if no one can buy its trademark rights, then it’s a chain business if it has a minimum of two locations.
Can anyone open a franchise or a chain?
If you have the financing for it, you can start a company that can franchise or be a chain in the long run.
To have a franchise company, you need to have a brand and whether others are willing to pay to buy the name.
To be a chain, you need to own a company that has a minimum of two locations.
Amit Gupta is an experienced expert in digital marketing and co-founder of DrFranchises. With more than 11 years of knowledge in franchise digital marketing, SEO, email marketing, and social media marketing, Amit has helped many brands achieve incredible success online. As a passionate entrepreneur and owner of 7 franchises, he continues to study franchise models, looking at costs, revenue, and profitability to guide brands toward profitable growth. When he’s not working on digital marketing, Amit enjoys spending time playing with his beloved dog.