Introduction
Choosing between a corporate-owned and franchised business model is a consideration that is essential for long-term success in expanding a business. Although each strategy has benefits, the franchise model is potentially a better option for organizations looking to grow quicker since it's an “easy-use” business model, entails lower financial risk, and offers local adaptation. But choosing the right franchise model is done through a thorough comprehension of both systems' workings and how they complement the brand's strategic objectives. Under a corporate-owned model, the business maintains complete control and ownership of its operations. By maintaining uniformity across all sites, this centralized organizational strategy protects the integrity of the brand and the stability of the customer experience. For example, businesses such as Starbucks uphold a corporate model to ensure product quality, brand image, and reputation globally. Although this model offers stability, it frequently necessitates a large initial investment and close supervision, which may restrict the rate of expansion. On the other hand, a franchise model- allows business owners to grow quickly by licensing franchise locations. These franchisees utilize local knowledge and the entrepreneurial drive to improve operational flexibility and community involvement. As demonstrated with franchises such as McDonalds and Subway, franchise models are a great option for businesses with aggressive development goals since they allow for scalability with minimal financial strain on the parent company. The objectives of the company, market conditions, and the availability of resources influence the ideal franchise model. While brands that prioritize scalability and local market reach may profit from franchising, those that aim for high control may opt in for a corporate model. The choice between a corporate and franchise model is ultimately narrowed down to a balance between speed, control, brand goals and targets. In this blog, we will define and discuss the differences between the two business models while identifying the positives and negatives for each approach to find you the ideal business model.
Franchise
According to Investopedia, a company may franchise its products and brand name if it wishes to expand its market share or geographic presence. A combined enterprise between a franchisor and a franchisee is called a franchise. The parent company is known as the franchisor. The idea behind a franchise is selling the right to utilize the brand's name and concept through an established business plan. The initial start-up fee and yearly license fees are often paid by the franchisee to the franchisor in exchange for obtaining the concept. In the U.S, franchises have a long and illustrious history. Two businesses, the McCormick Harvesting Machine Company and the I.M. Singer Company created the organizational, marketing, and distribution systems that are regarded as the ancestors to franchising. High-volume production prompted the development of these innovative business models, which enabled McCormick and Singer to offer their sewing machines and reapers to a growing domestic market. The 1920s and 1930s saw the development of the first franchises in the food and hotel industries across the United States. In 1925, A&W Root Beer opened its first franchise locations. After opening its initial location in 1935, Howard Johnson Restaurants quickly grew and laid the foundation for the franchises and restaurant chains that now characterize the American fast-food market. One of the biggest successes of owning a franchise is knowing for a fact the business plan works! Therefore, investors do not have to worry about forming an organizational plan to ensure the business' success. By giving franchisees access to an established brand and a tested business plan, franchising lowers the risk involved in launching a new company from the ground up. Because the franchisor has already created effective systems, procedures, and strategies, it is simpler for franchisees to duplicate and ensure success. Franchising provides investors and entrepreneurs a distinctive route to business ownership with an established support network and a well-known brand. New business owners can access a tested business model by joining an established franchise, which lowers many of the risks involved in starting from scratch. Franchisees have access to a multitude of services that facilitate the successful launch and expansion of their businesses, including marketing support, training, and bulk purchasing power. Instant recognition of the brand gives franchisees a big edge when it comes to attracting clients. New locations can begin with a consumer base that is familiar with the brand because established franchises typically have a well-known reputation and strong brand loyalty. Often, franchisors provide franchisees with an abundance of assistance and training. Along with continuing assistance to help develop and overcome obstacles, this also offers basic training on operations, marketing, and customer service. When compared to independent startups, franchise businesses frequently have lower failure rates. This is partially because of the franchisor's operating methods, brand reputation, and guidance. Even though franchisees are required to adhere to certain rules, they still run their own businesses and acquire a great deal of independence. Part of franchising is working around the clock, but not always having to be on site for the business to be self-sustaining and successful. For those who aspire to be business owners, owning a franchise site and being in charge of daily operations can be empowering and flexible. Although franchising has many benefits, there are some disadvantages to note. Because franchisees are required to follow strict rules and regulations established by the franchisor, they frequently face considerable limitations on how they can operate their businesses. Over time, it can become an expensive endeavor due to high initial costs and continuous royalties that reduce revenues. Franchisees may also find it difficult to make innovative decisions and struggle with little creative freedom. Generally, a brand's entire reputation has an impact on the franchisees. If another franchise store has problems, such as subpar customer service or legal challenges, all franchise locations may suffer. Moreover, franchise agreements are short-term contracts that need to be renewed after a certain period of time. The franchisee may be unsure about long-term ownership because renewal terms are subject to change and there is no assurance that the franchisor would provide renewal under the original terms.
Corporate
A corporation is a legal entity that exists independently of its owners. Corporations often have many of the same legal rights and obligations as individuals. They are able to hire staff, possess property, make contracts, lend and receive money, sue and be sued, and pay taxes. In contrast to partnerships or sole proprietorships, corporations provide their shareholders with limited liability, which shields individual assets from the obligations and liabilities of the company. Because of this structure, corporations are a desirable choice for business owners who want to grow their operations and draw in investors. Although its shareholders benefit from dividends and stock growth, they are not held personally responsible for the debts of the business. A board of directors oversees the administration and strategic direction of corporations, making sure that it is in line with the interests of shareholders. Corporations can range from small, private entities to large, publicly traded companies like Apple and Coca-Cola with shares available on stock exchanges. When a group of shareholders with a shared objective establish a firm, a corporation is formed. By holding stock shares, shareholders demonstrate their ownership of a company.Businesses have the ability to give their shareholders a profit of the business revenue. Charities and fraternal organizations are examples of corporations that are nonprofit or not-for-profit. State laws in the United States govern the formation and operation of corporations. The Securities and Exchange Commission (SEC) is the federal agency responsible for regulating public enterprises. The following steps are taken to form a corporation. First, create and submit the Articles of Incorporation, also known as a Certificate of Incorporation, to your state's Secretary of State or other relevant authority. Important information including the corporation's name, mission, registration agent, and authorized share count are all included in this document. Stock can be issued to the original shareholders after incorporation. In addition to publicly establishing ownership in the business, this step may aid in capital raising. Second, create the corporation's internal regulations as outlined in its bylaws, which also specify how it will be run. Usually, they contain details about shareholder meetings, voting protocols, the functions and duties of directors and officers, and other topics. Third, A board of directors is developed, necessary for corporations to supervise management and make important decisions. The directors are in charge of adopting the company's bylaws and are usually listed in the original filing. There are several benefits to incorporating a corporation, particularly for entrepreneurs and business owners seeking legitimacy, asset protection, and expansion. Two of the biggest advantages to creating a corporation is having limited liability and tax cuts. By incorporating, shareholders' personal assets are safeguarded. A corporation lowers personal financial risk because its stockholders are usually not held personally liable for the debts and liabilities of the company because it is a distinct legal entity. Corporations have access to various tax deductions, including benefits related to health insurance, retirement plans, and business expenses. S corporations are characterized by shareholders receiving profits and losses, which they then record on their individual tax returns. For federal tax purposes, S corps are regarded as pass-through entities.This type of corporation can avoid double taxation by distributing revenue directly to shareholders. On the other hand, C corporations, which are corporations who file their own tax returns as profits and losses, might alternatively choose to reinvest gains into the business at possibly lower tax rates.Although corporations have many advantages, they also have substantial disadvantages that can affect operations and profitability. More administrative and regulatory responsibilities are brought about by the corporate structure, which can take a significant amount of time and money to handle. Compared to other business arrangements, corporations are more costly to establish and run. They demand a lot of legality, record-keeping, and paying yearly filing costs. Additionally, corporations are sometimes susceptible to double taxation, which lowers overall revenues by taxing both the company's profits and shareholder distributions. Taxes are paid by corporations on their profits and by shareholders on dividends. Moreover, a board of directors and shareholder approvals are only two examples of the many levels of oversight that can make the business decision-making process complex. Financial statements and ownership information are among the things that corporations are required to publicize. Some business owners may be concerned that this transparency may result in a loss of privacy regarding the operations and financial standing of the organization. When compared to alternative business arrangements, these factors may make corporations less flexible and more expensive.
Conclusion
The choice between franchising and incorporation as a business model is ultimately a personal choice that is heavily influenced by the entrepreneur's particular objectives. Business owners must carefully evaluate their goals and available resources because each choice has distinct benefits and drawbacks. For people who want an organized approach with built-in assistance, franchising appeals. However, incorporation offers more control and the possibility of unrestricted expansion, making it a better option for business owners looking for flexibility and independence. There is no one-size-fits-all solution; rather, the best option depends on the particular situation and long-term goals. Entrepreneurs can position themselves for success in their chosen field by balancing the advantages and disadvantages of each model and matching their business plan with their career and personal objectives.