Franchises and branch offices are the two most common models for expanding your business. While both practices allow businesses to go beyond their market, they have vastly different elements of ownership, control, operations, and financial investment.
What matters is choosing the right expansion model to suit company needs. A franchise allows a business to expand at a relatively low cost with minimal financial risk, provided it has independent franchisees. In contrast, a branch office enables the parent company to have 100 percent control, but the investment cost and direct management are generally needed. Knowing these differences helps entrepreneurs and investors make informed decisions.
What is a Franchise?
In short, a franchise is when you have a contract with a corporate store to open your own store but run it under their name.
A parent company and an individual or entity that wishes to open or operate a business under the parent company’s brand name. Free-standing businesses are operated by a franchisee but regulated by a franchisor in compliance with rules, standards, and systems dictating business operations.
How do Franchises Operate?
The franchisor provides the business model, branding, and operational framework to the franchisee. The franchisee is an individual who makes an initial investment to obtain the rights to sell a company’s products or services and pays franchise fees and royalties to the franchisor. The franchisor trains franchisees, supports their marketing, and helps them grow their businesses—all while ensuring the brand quality is maintained.
Examples of Franchises
Notables Carried out by: Franchising McDonald’s, Subway, Domino’s Pizza, KFC, Starbucks Many of these businesses have achieved global success through the franchise model.
What is a Branch Office?
The branch office is the subdivision of the parent company that acts under its direct jurisdiction; A branch office, unlike a franchise, is not owned independently and is part of the parent organization.
How Branch Offices Operate?
A branch office operates under the same business plans, strategies, and branding as the parent company. The parent owns, pays for, and controls all the branch operations and makes all the significant decisions concerning advertising, hiring, and the business in general.
Companies That Have Branch Office Examples
Some large companies that use branch offices to expand their reach are HDFC Bank, ICICI Bank, Reliance Retail, Tata Motors, and Infosys. These companies operate numerous branch offices while preserving a unified brand image.
Franchise vs Branch Office: Major Differences
1. Ownership and Control
The franchisor can be described as the party that owns and operates the brand. Franchisors are responsible for managing individual franchise businesses. A franchisee has some degree of independence but is bound by contract.
On the other hand, a branch office is 100% owned and operated by the parent company. The parent organization has all the decision-making power, creating uniformity for all the branches. A branch office’s employees report directly to the parent company.
2. Legal Structure
Franchising is a separate legal entity, and the franchisee is responsible for the business, its operations, liabilities, and debts. The franchisee’s actions and/or inaction can only impose limited liability on the franchisor.
In contrast, a branch office does not have independent legal status. It is not considered to be a separate entity but is instead part of the parent company. Thus, the parent company has legal and financial responsibility for the activities, liabilities, and debts of its branch offices.
3. Investment and Income
Franchisees put their money on the line when establishing their business, generating franchise fees and ongoing royalties for the franchisor. Franchisees cover operating expenses in their specific location, and the franchisor can capitalize on revenue-sharing and brand growth.
Branch offices, in contrast, require the entire financial dedication of the parent organization. Since the branch is a part of the parent company, income or loss belongs to the parent company. It is riskier financially, but it gives you more levers to pull on operations.”
4. Operational Independence
Franchisees enjoy a degree of operational autonomy. They must adhere to the franchisor’s business model and quality controls, but they have leeway in decisions regarding the local market, such as hiring and tactics for engaging with customers.
Branch offices do not have any operational independence. The parent company dictates everything from hiring practices to advertising campaigns, enforcing strict uniformity from one location to another.
5. Maintaining Consistency Across the Brand and Customer Experience
There is a variable degree of brand consistency, depending on the management style of the individual branches; some franchisees may have looser controls than others. Even with quality control being enforced by the franchisor, there may still be discrepancies in customer experience.
Branch offices have more consistent brand expectations as they are bound by the same management structure and corporate policies. Customers at all branch locations receive the same service and product quality.
6. Risk and Liability
A franchise transfers a considerable amount of financial and operational risk to the franchisee. In a franchise business failure, most of the money lost by the tacky entrepreneur who bought a franchise goes with them and the reputation of the franchisor may suffer, but not financially.
However, a branch office presents a higher risk to the parent company. Since the company owns the branch, it is directly liable for any litigation, financial loss, and operational failures.
7. Scalability and Expansion
When franchising, businesses can grow quickly while carrying less financial risk. Because franchisees put up their own money, the franchisor can enter many different markets with very little capital outlay.
Branch office development tends to be gradual and requires significant capital investment. However, the parent must build infrastructure, hire employees, run operations so expansion becomes more resource unfavorable.
Conclusion
There is no specific ideal that propels the need for a franchise or a branch office; it depends on the company’s expansion strategy, financial resources, and aversion to risk. Franchising requires less capital to grow and can be a faster way to scale, but it leads to less control over operations and consistency in a brand. However, branch offices offer more control, brand consistency, and direct profits but at a higher cost for investment and management resources.
Conversely, if the goal is to grow rapidly but with less financial risk, franchising may be the better option. If maintaining brand integrity and full operational control across all units is the objective, then establishing branch offices is the preferred option.
