Franchise vs. Chain Businesses: How Do They Differ?

Growth is the common denominator between franchise and retail chain business models. Besides this factor, they are diametrically different because of how they operate. Many people unintentionally use the terms interchangeably. However, they are quite dissimilar and the distinction must be clearly understood by aspiring entrepreneurs who are looking for business opportunities in Canada. The information is also useful for those who seek to expand their ventures through these models.

While both types have several units or outlets across geographical locations, they cannot be considered the same. Chain businesses are a group of branches or units owned by a parent company and using the same brand name. Conversely, franchise businesses have several units owned by individual franchisees but operating under the same brand name. Let us help you understand the basic differences between the franchise and chain business models. This information will clear your doubts and help you choose the right growth path.

1. The Concept Behind Chains and Franchises

A chain is a business with a presence in multiple geographic locations that are run by the same owner. The parent company is responsible for the growth, profits and losses incurred by every unit in the chain. The model can comprise two or more retail stores that can be present across cities, states and nations. Examples of chain businesses are supermarkets like Loblaws, Sobeys, Metro, etc. Other retail chains include clothing brands, pharmacies and electronics businesses.

On the other hand, a franchise creates several outlets sold to franchisees. The franchisor does not own the individual units, but the franchisees have the licence to use their brand name and sell their products. The franchisor earns royalty in exchange for this opportunity and provides training and support to maintain brand consistency. Examples of franchises include Tim Hortons, Pizza Pizza, Canada Bread, etc.

2. Funding of Chains and Franchises

The parent company sets up and develops the new units for a chain business. The funds for the establishment of the chain stores are secured from the brand's profits. The business owner can also take out a loan to finance the new stores in different locations because they incur leasing, staffing, stocking, marketing, and management costs.

Many budding entrepreneurs looking for a business for sale Canada opt for a franchise opportunity because it comes with the backing of the franchisor. These new franchises are financed by the franchisees who purchase them. The franchisor uses the selling price for site selection, lease expenses, fit-out, training, marketing and the launch event. They also set aside a portion as their income from the sale.

3. Brand Consistency in Chains and Franchises

A chain business is completely under the control of the owner, who runs and manages all the units. The owner is in charge of the materials, stock, marketing, branding, and distribution. Thus, there is no scope for deviation from the branding guidelines and standardised procedures created by the parent company.

Alternatively, the franchisees control their units with guidance from the head office. They are supposed to follow the operations manual and sell the products according to the franchisor’s instructions to maintain consistency. However, it often becomes challenging to maintain standardisation across units. If the franchisee fails to follow the consistency protocols, the brand’s image is affected.

4. Financial Risk in Chains and Franchises

A retail chain business is a high-risk model for entrepreneurs because they directly invest in the units. They are responsible for the profits and losses which impact the entire organisation. If one of the units in the chain is underperforming, it can become challenging for the business to maintain a positive cash flow because the losses impact the financial health of the company.

Many entrepreneurs prefer franchising to reduce risk. A franchise is a low-risk model because the losses faced by the franchise units do not impact the brand much. Since the franchisee invests in the unit, and the franchisor only takes a part of the profits as royalties, it does not cause any serious financial damage to the company.

5. Recruitment in Chains and Franchises

The parent company controls and manages the recruitment of staff members at different units of the chain business. They must hire talented managers to run the individual units and provide them with trained staff members to complete the daily operations. The success of the unit heavily depends on the staff, and thus, they must be recruited carefully.

Many entrepreneurs looking to purchase a business for sale in Canada opt for a franchise because it gives them the freedom of entrepreneurship along with desired support. They have to hire their own staff members. The franchisor does not get involved in the recruitment process but they are ready to provide training to the candidates to ensure consistency.

6. Closing A Chain or a Franchise Business

A chain business may have to close one of its stores if it is not performing as expected and is incurring losses. The business owner must prepare for the shutdown by informing the staff and clearing the dues of the suppliers and employees. They must also inform the customers and cancel the lease, licences, and permits.

Franchisees must have an exit strategy because franchise agreements come with a limited period. The contract can be renewed for an additional term if the franchisor approves. The franchisee can terminate the contract before its end date in case of a dispute. They can also sell the franchise to third-party by putting up the business for sale in Canada. The franchisor can also suggest buying back the unit.

7. Expansion of a Chain Vs a Franchise

Expanding a chain business is difficult for the owners because they must have sufficient funds. They can secure funding to set up a new store but adding new units to the chain requires making huge profits from the existing stores. Also, it takes time to reach that stage where the entrepreneur can easily add new stores to the chain without worrying about costs. Large corporations can achieve this target.

Expanding a franchise is easy. The franchisor does not have to invest money in the new outlets. They only need to find talented franchisees with the capital and competence to perform. They only have to monitor the units and ensure consistency. Market analysis to find an ideal site is all that is required to start a new franchise.

Wrapping Up

Chains and franchises differ on various levels, including ownership, funding, exit strategy, expansion, recruitment, etc. Entrepreneurs looking to expand their business must understand both models to choose the right method.