Seth Lederman, CEO of Frannexus, award-winning franchise consultant and author of “Profits are Better Than Wages.”

Often I’ve found that people who are looking for business opportunities are unclear about what the differences are between a franchise and a chain establishment. Those looking to invest should also understand what makes them different so they can choose the best investment for success.

If you are either looking to own a franchise or trying to decide whether your business model would be more profitable for you to become a franchisor or to operate multiple chains, these are the factors that you want to consider.

1. Business Models

Franchise

A franchise differs from a chain because it entails a business arrangement between an individual who runs a unit or branch from a larger company. The individual or franchisee, therefore, behaves as an independent contractor by purchasing the rights to the brand name, framework support and business model.

The franchise agreement is the governing document that outlines the partnership’s conditions and terms. One of the key advantages of a franchise arrangement over a startup is that the franchisor can help mitigate some of the risks that come with a new business startup.

Chain

Chains are similar to franchises because they have multiple locations or units, but differ because each of the units or locations are centrally owned by the parent company. Chains, unlike franchises, do not have individual or independent owners. Each location is overseen by a corporation that holds control over all aspects of the chain’s operations and management.

The corporation, therefore, also assumes both the losses and the gains of the locations. The corporation is also responsible for maintaining uniformity and consistency across the various locations.

2. Financials

Franchise

The individual or franchisee is responsible for the initial franchise fee and all of the associated royalties. Rights to use the business model, brand and ongoing support are all typically covered in the initial franchise fees. The owner is also responsible for opening costs, as well as the costs associated with operating the business, including things like real estate, inventory, working capital and equipment.

Franchisees often, however, have the advantage of lower overhead costs because they can directly manage the business, therefore, lowering labor costs, as well as taking on additional roles for the business’s management and operation.

Chain

The parent company expands the chain through loans or the reinvestment of profits. Therefore, the financial responsibility rests on the corporation to open new locations. That can lead to slower growth and expansion times when compared to a franchise model.

Chains tend to have higher costs for operation because of the centralized nature of management and a larger payroll base. All losses and profits rest with the corporation, which affects its overall financial success and health.

3. Operational Flexibility And Control

Franchise

Although franchise owners have a business model to follow, they enjoy a higher degree of control and flexibility for managing their individual units. Owners make operational decisions daily, as long as they fall within the guidelines of the franchise.

Individual owners can also make choices about managing staff, pivoting for local market demands and setting schedules, while still staying on-brand per their agreement. That allows them a sense of independence to meet their community and customer needs, while also benefiting from the original business model practices.

Chain

The parent company for a chain maintains all control over the locations. That means it takes full control of all operations, product offerings and the customer’s experience at all units.

Instead of owners managing, managers at chains adhere strictly to the guidelines of the parent company and policies with very little room for adaptation or alterations. While that maintains uniformity for brand presence, it does not always meet an individual location’s unique needs.

4. Expansion And Growth Opportunities

Franchise

Because of the adaptability and financial business model of a franchise, they typically can expand more quickly without financially burdening other locations. That means that individual owners can often expand without incurring debt, and at a pace that is reflective of their financial health and individual success. The more franchises that an individual owner owns, typically, the more they earn and the greater their asset accumulation is.

Chain

Unlike franchises, chains tend to grow more slowly because opening new outlets puts a financial burden on the parent company. Therefore, the company is always weighing growth versus maintenance.

Chains do benefit from a strict centralized control and the consistency of uniform operations, but that can sometimes lead to stagnant growth and one unit significantly weighing on the health of the rest.

5. Other Advantages

Franchise

For those looking to begin a business, franchises have the advantage of a proven business model for success. Franchises tend to give business owners both the benefit of a successful playbook and the freedom to have some control and flexibility to manage and operate, bearing it is within the guidelines of the franchise agreement.

Because franchise owners only have to worry about the health of their individual units, expansion and growth are often quicker because they can use immediate resources without worrying about how expansion will affect the rest of the units.

Chain

Chain companies have the advantage of a central organization or corporation that takes care of each unit with uniformity and standardization. While each of the units has no autonomy and very little control, that means that things run predictably. For those who want to maintain control over each unit and their profits, chains keep the brand cohesive and under one roof.

How To Decide

Which one is right for you? That depends on where you are at in the business process.

Expanding your business to a chain might make sense to maintain control and profits, but it also comes with the risk of losses that affect the whole. Owning a franchise allows you to take a successful business model and make it your own independently.

It really depends on your goals and objectives.

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