Growing any kind of business comes with many different risks and also a lot of effort to keep everything in balance.
This is not easy, and that’s why there are different business models to accommodate different needs.
Franchise and corporate business models are two of these that help companies to expand their reach in different methods.
You might be a new entrepreneur looking to own a business and want to know which one you can buy or a business owner looking to expand.
You need to know these two different models and their differences to know what to expect and what fits the best to your needs.
This article will cover everything about franchise and corporate business models and explain the differences between them.
Franchising is one of the most popular business models, and it is a great way to expand your business without spending too much.
This type of business model allows others to establish their own business under the parent company’s name and trademark, selling the same products with the same type of service.
The individual that buys the trademark capitalizes the brand’s existing recognition and image to attract customers.
To operate a franchise, you sign a franchise agreement with the parent company to get the rights to the brand.
You pay a fee to the main brand in a lump sum which buys these rights for the specified time in the agreement, generally either for ten or twenty years.
Then, you pay all the other related costs, from the start-up costs to the ongoing costs to start and operate the business.
Later on, you annually pay a percentage to the parent company from your gross revenue as a royalty fee.
In this method, the parent company doesn’t spend anything at all in the new location because the franchisee does it all.
The only thing the parent company does is help the franchisee choose a location and provide training, equipment, and some other crucial details.
McDonald’s, Subway, Burger King, and 7-Eleven are all some of the famous franchises.
Both franchise and corporate business models have several locations serving different areas.
Though there are many differences, the main difference lies in the management of the locations.
As we mentioned, the franchise locations’ owners are either individuals or companies that buy the parent company’s trademark. In corporations, however, this is not the case.
A corporate store is an actual part of the parent company, run by the parent company itself.
The corporate has all the jurisdiction across all of its corporate-owned locations. It handles the management, oversees the operations, and takes 100% of the profits.
They make all of the decisions themselves and don’t sell their name rights outside of the company.
Starbucks is perhaps the most famous and the best example of a corporate company. All stores of Starbucks are company owned, and the corporate office makes all the decisions about the stores through the managers of the locations.
Starbucks owns 100% of the rights to the name and the location and handles every single problem through corporate decisions.
Even though these business models have similarities in how they work, they have more differences than similarities.
What makes businesses choose one over the other are generally these differences and what difference is more important to them than another.
Here are some of those differences that might affect your decision.
When a corporate is expanding, it controls every part of the expansion, from land selection to daily operations.
A corporate has the ultimate control and say over the expansion of each location which makes it easier for companies to grow responsibly. With a franchise, the parent company doesn’t have as much control.
Franchises generally can have a saying on the location and approve or disapprove, but they can’t specifically choose the location.
They also can’t participate in the daily operations and some of the management decisions unless they are breaching the agreement.
In the expansion of a corporate, all of the required capital comes from the parent company’s profits or their lending institutions.
The corporate company effectively pays for every penny they spend on the new location.
No other people are chipping in for the costs of the location, which makes it far more expensive than the franchise model.
In the franchise model, the individual pays all the associated costs except for certain things like equipment, training, and so on.
This makes it easier for franchises to scale much faster and more efficiently financially.
The corporate takes all the responsibility for its locations, meaning they run the entire operations based on its own playbook and rules, and they manage it.
This lowers the possibility of bad press with bad management as they have direct control.
In a franchise, because the individual is running it, a bad operation is far more likely, which could damage the brand’s reputation.
In addition, the financial risks are also separated in the franchise model. Because the individual is paying for the majority of the costs, in case of failure of the location, the parent company doesn’t get as much financial damage.
In the corporate model, all the financial losses will be on the main company’s financial report, affecting its financial power.
In the franchise business model, the parent company does not have 100% ownership of the location.
They only have the right to the trademark, and all other parts of the location belong to the owner of the location, including the land and building.
Sometimes franchises provide the land themselves, but the majority of them let the individual handle it.
In the corporate model, the company owns the location and everything on the land.
This means that they have 100% control of everything happening in that location, and it fully belongs to the main company as opposed to the franchise model.
The franchise business model also offers some sort of control. However, there are limitations, especially with the daily operations of the business.
Profit and Loss
When a franchised location makes a profit or loses money, it affects the franchisee and not the company’s own money.
Franchisees generally have to give a percentage of their annual gross revenue to the main company.
They also own the losses, if there are any. So anything comes up from the individual’s pocket in case of a loss. The individual also gets the remaining profit after the royalty fee.
In the corporate-owned location, both the profits and the losses belong to the main company.
So, if anything happens in any of their locations, the main company either loses or earns money which affects their financials.
This is also in alignment with the risks involved in both models, as franchise options offer less risk when it comes to financials.
Peace of Growth
One of the massive benefits of the franchise business model is that it allows rapid growth because you don’t need money to open new locations.
Most of the important things are taken over by the individuals willing to use your brand, so it gets extremely easier to grow the number of locations. With corporate, growth can’t be as fast.
The corporate business model requires the main company to pay for everything since the company operates it and opens the location.
It requires deep due diligence, finding the necessary financing, and taking your own risk. All these take a lot of time and effort.
If a franchise company can find individuals willing to use its trademark, it will grow way faster than a corporate.
Also Read: What Are Franchisees Usually Liable For?
Franchise and corporate are two very viable and popular business models in the business environment, and both come with their own differences.
The decision to choose one or the other mostly depends on what you want from your business. Franchising allows you to grow faster, keep the risks as low as possible, and scale faster.
On the other hand, corporate business models keep the ownership of their locations to themselves, take all the profits, and have total control over their expansion.
Both come with their own benefits and disadvantages and if one fits your profile better than the other, then that option will be a better fit for you.
Can franchise and corporate business models be the same?
No, they can’t be because, fundamentally, they work differently in the expansion model.
A corporate can’t be a franchise if it doesn’t allow others to buy its trademark rights and open locations.
What is the biggest differentiator between a franchise and a corporate business?
The biggest difference between the two models is how they expand to new locations.
A corporate expands with its own resources and money, but a franchise gets individuals to do the majority of the work for them.
Is every franchise also a corporate business?
No. There might be franchise businesses that do not incorporate the corporate management model.
It depends on the structure, but there is a possibility that a franchise is not corporate.
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.