Subsidiaries vs Franchise Business: Advantages and Disadvantages

Subsidiaries and franchising are considered two of the most famous expansion strategies in business management. They are two ideal ways to increase profits and expand in a market with minimal risk; however, like other diverse business models, they have advantages that make them ideal for some projects and some disadvantages that also make them unsuitable for others.

In this article, we will dwell on Subsidiaries and franchising in some detail, explaining the purpose of both, the advantages and disadvantages of each model, and which one is best for your project as well.

What is the difference between an Affiliate and a Franchise?

Some people usually confuse the concepts of Subsidiaries and franchising, although there are obvious differences between the two models. This confusion is due to the fact that both do not have full ownership of their own business models.

Let’s simplify it by clarifying what is meant by both as follows:

What is meant by Subsidiaries?

A subsidiary is a company that is partially owned or controlled by another company with more than 50% of its shares, or completely by 100%, and is then called a wholly owned subsidiary.

Large companies usually take this step in order to penetrate new markets, avoid legal proceedings resulting from mergers, or get rid of regulatory obstacles to establish new companies.

The company that owns the subsidiaries here is called the parent company, in which it has the most right to vote on the board of directors as well as the right to supervision and control.

In the case of partial subsidiaries, the parent company has partial supervision over the management process and indirectly in most cases, but in the case of wholly owned subsidiaries, supervision is usually direct and daily from the parent company as well as the organization of the decision-making mechanism.

 Advantages of Subsidiaries

1. One of the means of successful strategic expansion for large companies.
2. Through it, the parent company can own multiple companies in various fields with fewer responsibilities.
3. Through it, it is possible to own already-existing and successful projects without the need to establish a new one.
4. In the event of the subsidiary’s bankruptcy, this does not affect the parent company if it is treated as an independent, separate entity.
5. It represents a successful strategy for breaking into new markets in different countries without the need to undergo regulatory laws or incur financial costs to establish a new foreign enterprise.
6. Subsidiaries have a separate board of directors from the parent company and have an aspect of flexibility and freedom in making decisions.
7. The presence of separate subsidiaries in specific areas helps to increase the efficiency of the services provided and, consequently, positively affects the raising of the market value of the parent company’s shares and its position in the market.

 Cons of Subsidiaries

1. This type of business relationship requires strict legal regulation and careful control by the parent company.
2. The legal costs of creating or buying a subsidiary are expensive.
3. Some parent companies insist on the formation of a new board of directors for already existing subsidiaries, which changes their successful organizational structure and sometimes harms the business and causes its movement to slow down due to the movement of new changes.
4. The creation and management of a subsidiary requires some bureaucracy in dealing with the management of the parent company, which can sometimes kill creativity and flexibility.
5. The parent company has a tax obligation to issue a complex financial statement on its dealings with the subsidiary, which requires the effort, experience, and extreme commitment of accountants.
6. Despite the ability of the parent company to form a new board of directors, its competence in partial subsidiaries is not as huge as in fully owned companies.
7. The divergence of goals between other investors in subsidiaries or their original owners may cause problems and obstacles that slow down the workflow or quality of work or strain relationships within the environment in which employees work.

What is meant by commercial franchise?

A commercial franchise is a type of famous commercial license in the business world in which the owner of a successful trademark grants another person the right to exploit this mark to stop a set of controls and laws; the former in this case is called the franchisor, and the latter is called the beneficiary or franchisee.

In the case of a commercial franchise, the owner does not buy or control another business model, but he grants the right to exploit his trademarks at will in order to quickly expand horizontally, publish his brand name, and increase its market value with the least amount of risk and the highest degrees of control as well.

If the agreements between the franchisor and the owner stipulate a set of conditions that the latter violates, the former has the right to withdraw the franchise immediately.

Advantages of Franchising

1. Getting a business franchise for already existing and successful companies in the market saves the trouble of establishing a new brand.
2. The franchisor provides the beneficiary with advanced technical and technical support services and also provides him with a disclosure document in which both parties commit not to advertise how the project is managed and operated.
3. The costs of acquiring a commercial franchise are relatively lower than those of establishing a completely new enterprise.
4. Franchise projects benefit from the global reputation of the original brand, and any success in any branch of the world, by extension, is attributed to it as well.
5. The franchisee benefits from the marketing campaigns carried out by the parent brand in promoting his project without even participating in it financially or administratively by planning.
6. Franchisees provide external professional and management consulting services to help franchisees successfully manage the brand and maintain its reputation and high market value.
7. Franchise projects have fewer financial risks than other projects because they are business models that have already proven successful and have their existing audience willing to deal with them.

Disadvantages of Franchising

1. A permanent franchise comes with strict restrictions by the grantor, which makes the management process characterized by bureaucracy and a minimum of creativity.
2. The commercial franchise fee is continuous between the donor company and the franchisee, which makes it a continuous burden throughout the contract period.
3. The franchisee has fewer powers in the management or operation process and cannot change in any way the visual identity of the brand, add, or remove a product without referring to the franchisor.
4. Just as the franchisee is affected by the good reputation of the brand, he is also affected by any negative rumor or mistake of any of the other branches.
5. Some franchising companies exaggerate the agreed terms of the contract, which puts the franchisor at risk of withdrawing the project from him at any moment.
6. The efforts made in franchising are not reflected on the franchisee to the same extent as they are reflected on the brand owner; the franchisee here is not treated as an independent transaction but is fused into the parent brand.
7. A commercial franchise is a contract of limited duration, so it is not considered the private property of the franchisor, and the franchisor can refuse to renew the contract and give it to another at a higher price.

Subsidiaries vs Franchisees: which one to choose?

In the previous lines, we discussed the difference between Subsidiaries and franchising separately, and if you want to know which is the best as a successful business model, we first have to explain these differences side by side as follows:

From the previous table, it can be understood that Subsidiaries represent a successful business model, whether a company wants to break into new markets or expand horizontally in diverse areas without affecting its commercial reputation or market position, but franchising is also the best model in the case of companies that want to exploit the popularity of successful and well-known business models to achieve material profit and quick success.

So if you are wondering which of the two models is better, the answer will be both; it depends on the strategic goal you are pursuing, the size of the expected risks, as well as the percentage of control you want to have in your project.