Differences Between a Franchisee and a Company Owned Store Within a Franchise Chain

Differences Between a Franchisee and a Company Owned Store Within a Franchise Chain

Franchising is a “business opportunity by which the owner (producer or distributor) of a service or trademarked product grants exclusive rights to an individual for the local distribution and/or sale of the service or product, and in return receives a payment or royalty and conformance to quality standards”(1). Whereas a company owned store within a franchise chain is owned and operated by the actual franchisor who in this case decides to manage the store themselves, for reasons I will further discuss.

There are a number of reasons why one might be a manager as opposed to a franchisee. One reason might very well be the amount of money needed to become a franchisee. A potential franchisee would need to come up with $408,600 to $647,000 in order to own their own McDonalds(2). Obviously not everyone who would like to be a business owner could afford to come up with this kind of money . This doesn’t even include the franchise fees and royalties that a franchisee would also be obligated to pay on a monthly or yearly basis. McDonald’s does allow for potential owners to lease the property for three years before deciding to purchase but not all franchisors offer this kind of program(2).

Someone wanting to own their own business might want to go the route of franchisee because the failure rate is significantly lower for franchises than it is for individual’s starting a non-franchised type of business. Franchises have an immense amount of training and support for their franchisees including a proven track record for picking winning locations. Some claim such as Subway say they have a less than 2% failure rate(3). But that is not the case and is far from the truth according to one source. Franchisors are being sued by scores of people right now who are filing suits that the failure rates that some franchises are putting out aren’t even close. The SBA lists several failure rates of franchises that they had lent startup money to and the rates ranged anywhere from 0% to 85%(4).

McDonald’s franchisee’s like Allen Whitehead did fantastic for years when franchising was in its golden years but he said after McDonalds allowed four more franchises to open up in his area he saw his sales plummet due to over-saturation of the market(3). So there is potential for franchising to be a safer bet but selection is key and before you decide to franchise you should do plenty of research. This might be one reason management in a potential franchise might be a better option from an investigative standpoint. It would seem in this day and age or any age for that matter good decision making is the foundation of any potential business owner.

Managing offers the opportunity to learn about the business and what is involved. After all you wouldn’t want to buy into a business you know nothing about and then find out that you hated it or that you didn’t have any experience for seeing how to handle many situations that come about from owning a business and employing the masses. In the end I believe whether one would prefer to own a franchise or choose to manage comes down to whether or not that person can afford to start their own franchise or not and how certain they are that they want to commit that franchise over the long term.

1. (Justis and Judd 1989, 6)
2. Careers in starting and building franchises By Carlienne A. Frisch pg 21
3. Beating the Odds in Small Business By Tom Culley Pg 48
4. http://www.bluemaumau.org/6812/2008s_sba_loan_failure_rates_franchise_brand
5. Franchisor Strategy: A Proposed Model and Empirical Test of Franchise versus Company Ownership.

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