Corporate Stores vs. Franchise Stores
As successful companies grow, there often comes a time when they run into the question of whether or not they want to keep expanding by their own means or branch out by allowing outside investors and businesspeople to purchase franchises of the business.
When it comes to corporate retailing and franchising, as with most things in business, there are some advantages and disadvantages to keeping the stores corporate-owned vs. selling franchises to qualified investors.
When a chain – which is defined by two or more retail stores having the same ownership and products or services – is corporate-owned, the parent company is solely responsible for all stores' business-related activities. From picking retail locations to hiring employees to operations to tax planning, they handle it all.
While most of the biggest food brands in the world offer franchising opportunities, Chipotle and Starbucks are two of the most famous examples of companies where all stores are corporate-owned.
When a company decides to go the franchise route, it licenses its intellectual property, business procedures, business model and brand to a franchisee who then owns and operates the store. The franchisee pays an upfront cost and ongoing royalty fees to the franchisor and must follow the corporate policies set in place by the franchisor.
A federal disclosure document (FDD) outlines the franchise agreement between the parties and essentially serves as the sales contract. Most fast food restaurants and retail brands offer franchise opportunities.
Corporate stores are solely owned and operated by the parent company. The parent company owns all individual stores, controls the day-to-day operations and takes on all its stores profits or losses. Because a company maintains ownership in corporate stores, they can make business decisions about company-owned stores without having to consult with franchisees.
If, for example, a restaurant is franchised, it cannot completely replace the menu without talking to the franchisor.
Franchise stores are owned by the franchisee who purchased it. Although the company and brand are the same as the parent company, the franchisees have control over their store's daily operations.
It is also possible for a company to have corporate-owned and franchise-owned stores. McDonald's is an example of such a company.
One of the primary benefits of a company choosing to sell franchises is that it provides extra capital and helps with funding. By selling franchises and charging royalty fees, a company earns money to assist with offsetting both corporate and franchise operational costs.
This additional financing usually puts businesses in a position to experience faster growth than corporate stores, where the financing usually comes from the business itself.
On the other end, the main benefit franchisees receive is that they get a company with a tried-and-true business model, an established set of customers, buying power and the ability to piggyback off of the brand. Because the business is not starting from scratch, it allows them to hit the ground running and avoid a lot of the early trials and tribulations many businesses face.
The advantage of company-owned stores is that companies get to retain ownership over their stores. Although franchisees must follow the agreements outlined in the FDD, at the end of the day, they do not work for the parent company.
Keeping full ownership ensures that all things run exactly as the company intends and they can have quality control. Restaurants, for example, will not be able to control how the locations are run and poor service could reflect negatively on the brand as a whole.