Expanding as a Chain or Franchise: What You Need to Know

Expanding as a Chain or Franchise: What You Need to Know

Your business is a success so now you are considering expansion. You want to build on your existing strengths and reap the benefits of your hard work. But should you franchise your blueprint for others to follow, or clone your existing business in new locations? Answering that question correctly is the most critical decision you will make. So, here’s a rundown of what you should to take into account, and what you need to understand.

What is a chain?

A business chain is defined as a group of stores trading under the same name, retailing the same range of branded products, and guided by the same corporate management and the same corporate policies. A chain of business outlets can be based in one local area, sited within one region, or spread across the nation. The largest chains effectively have a global presence. Every branch will have its own employees and managers.

The business owners will often seek to maximize the visual similarities between chain outlets by ensuring that features such as architecture, store design and layout are instantly recognizable in every location. Business advertising may also focus on a central figurehead, and/or the centralized origin of core features and values which all customers can expect to experience and benefit from.

The pros of starting a chain

With a chain in corporate ownership you maintain total operational control over every additional unit and are entitled to all of the profits. Furthermore, the launch of multiple businesses is ‘more of the same’ in every respect. The chain model also tends to favor more traditional management techniques, is relatively free from complex regulations, builds up the corporate balance sheet, and causes few administrative and/or logistical headaches provided that the branches occupy one fairly restricted geographical area.

The cons of starting a chain

A chain can be costly to set up because the owner must raise the capital needed to fund the venture. In addition, any chain spread across different regions soon becomes cumbersome to manage, and can be less productive because it is reliant on employed managers with less incentive to build a profitable enterprise. Another important point to remember is that a chain brings increased business liabilities as well as profits.

What type of business suits a chain, and what is required of the business owner?

A business with a popular and well-defined set of products and services (such as hotels, restaurants, and domestic retailers) can work well as a chain. Owners must be prepared to give strong leadership and communicate well. Some examples of popular American chains include:

  • Chipotle (Fast food chain)
  • Costco (Wholesale chain)

Alternatively, you could expand your business as a franchise.

What is a franchise?

A franchise is a specific kind of business chain which consists of separate franchised units. Each of these units has a separate owner who has invested in that particular business. However, the parent company in a franchise arrangement produces a blueprint, known as a business franchise agreement. This is a set of guidelines which all franchised units are (legally) obliged to follow. The agreement will stipulate how many aspects of the business are to be carried out – for example, the range of products to be sold, the operational procedures that must be adhered to, and perhaps also a common pricing structure which each franchise unit must follow.

Though the outcome sometimes produces a similar kind of uniformity to a standard business chain, the key difference is that each franchise unit has just one local owner.

The pros of starting a franchise

Taking the franchise route to business expansion involves persuading potential owner-managers to invest in your business, which in turn limits your own investment risk. As a result, you can often quickly increase the size of your business holding to a considerable extent for relatively little outlay. Another major advantage is that your owner-managers will be highly motivated. Each will strive to grow their franchised business to increase their ROI, which will both underpin your franchise expansion and secure the franchise royalties you will receive in return for the right to operate your tried-and-tested business model.

The cons of starting a franchise

Though less expensive than starting a conventional chain business, starting a franchise does still have cost implications. You will have to set up a franchise-marketing team and finance each new venture until franchisee royalties start rolling in. In addition, you will have to create a franchise agreement, prepare your own franchise disclosure document, and handle a range of regulatory issues. Beyond that, you will need to monitor all potential regulation changes, provide the sustained support you promised in your franchise agreement, and promote your overall brand identity through regular marketing campaigns.

What type of business suits a franchise?

Though a franchised business must comply with the stringent terms of a franchise agreement, there must also be clear scope for a motivated franchisee to positively influence the business. This is often more a matter of the leadership/management relationship between the two parties than a particular type of business. Communication is generally more open than within a conventional chain. Some examples of popular American franchises include:

  • KFC (fast food franchise)
  • Snap-On tools (automotive franchise)

The decision to expand can be a daunting one and every business should go in the direction that best suits their business’ structure, whether you would like to take full ownership of each new location, or you would like investors to take the reigns.

The path varies for every business wanting to expand, so once you fully understand which elements of your business would best suit either a chain, or a franchise, then you will be able to take your business in the right direction.

By Bruce Hakutizwi, USA and International Accounts Manager for BusinessesForSale.com, the world’s largest online marketplace for buying and selling small and medium size businesses. Bruce has over 7 years’ experience working within the US business transfer marketplace connecting buyers and sellers.