Licensing vs FranchisingDifferences You Need to Know Between the Two!

Starting a new business can be a risky endeavor.

You’ll never know if your business will be successful unless you start it.

And even if your business is operating successfully for many years, there is always that threat of it suddenly shutting down on you.

Pretty scary right? But hey, if you’re still determined to start your own business even with such a risk, hats off to you.

One important trait that a business owner must have is to be courageous after all.

But if you’re someone who wants to dabble in the world of business ownership but cannot afford the risks that come with the formation and operation of a new business, don’t worry.

There are still options available for you and among them are franchising and licensing.

Sure, they may come with a fee, but you essentially get a great jumpstart by choosing to go with either option.

For one, you can skip the painstaking process of establishing your brand (which could take years).

With franchising or licensing, you will be able to ride on another business’s success to make your entrance to the world of business ownership a smoother process.

Now while both franchising and licensing seem to offer the same benefit, they’re two different things.

For example, a franchising agreement may allow a franchisee to make use of the franchisor’s entire brand and operations.

On the other hand, a licensing agreement may only allow the licensee to make use of the licensor’s trademark/s or technology.

In this article, we will be exploring what franchising and licensing are.

We’ll learn their respective definitions.

We will also list down the benefits they provide to those who avail of them.

Lastly, we will compare the two and then try to determine which is the better choice for certain situations.

What is Licensing?

Licensing creates a legal business relationship between at least two parties, wherein one party, the licensor, grants the other, the licensee, the right to use one or more of its registered trademarks.

In some cases, licensing may grant the right to use the licensor’s technology.

In exchange for the right to use the trademark/s or technology, the licensee is to pay a royalty fee to the licensor.

The amount will depend on what’s agreed upon between the two parties.

It may just be a one-time payment, paid at the start of the license agreement.

Or it could be a continuous fee based on usage, sales, and/or other performance criteria.

While licensing only covers the right to use another business’s trademark/s or technology, this also means that the licensee still has control over its business operations.

You see, a license agreement does not grant the licensor control over the licensee’s business operations.

Though, the licensor can still include certain stipulations to protect its trademark or any other similar intellectual property.

With licensing, a lesser-known business can make use of another more recognized business’s trademark.

This helps the lesser-known business get its product to the market (and sell) much easier.

It also fast-tracks customer recognition of the business than if it were to start from scratch.

For example, everybody knows who or what Disney is and the intellectual properties that it owns (e.g. Mickey Mouse, Donald Duck, Goofy, etc.).

Disney grants several other businesses the right to make use of its trademark/s or intellectual properties through licensing.

This results in the sale of merchandise such as clothes, cups, and toys among others that have Disney characters on them.

And whether we like it or not, it’s easier to sell a Disney product than a not-so-known one.

What Licensing Provides

To the licensor, licensing provides the following benefits:

• It grants the licensor another way to earn from its intellectual properties (which include its registered trademarks);
• By allowing other businesses to make use of its intellectual properties, the licensor can reach a wider audience. It may also be able to reach customers that were previously of its reach;
• Aside from earning royalty fees, the licensor can benefit from the free marketing

However, it also comes with the risk of the licensee misusing the granted license.

To combat this, the licensor can put in place certain stipulations to protect its intellectual properties.

To the licensee, licensing provides the following benefits:

• For a fee, the licensee acquires the right to use the licensor’s intellectual properties (e.g. trademark); usually, the licensor is a well-known company such as Disney, Calvin Klein, etc.;
• By using the intellectual property of another well-known business, it makes it easier for a lesser-known business to enter the market successfully. For example, if a lesser-known business is able to secure a license to some of Disney’s registered trademarks, it can sell its products much easier than starting from scratch
• While some license agreement limits the licensee as to what it can do with the licensor’s intellectual properties, the licensee will always have control over its business operations.

Due to the benefits that licensing provides, it is more applicable to product-based businesses.

What is Franchising?

Franchising, just like licensing, creates a legal business relationship between two parties (the franchisor and the franchisee).

However, unlike a licensor, the franchisor essentially grants the right to use its brand.

This includes the franchisor’s products and services, proprietary knowledge, intellectual property, and more. In return, the franchisee pays a fee (or fees) to enjoy such a right.

Essentially, through a franchise agreement, the franchisee can own a business that is practically identical to the franchisor.

In the US, the Federal Trade Commission (FTC) regulates the operations of franchises.

In addition, franchises must comply with state laws.

Since a franchisor is essentially allowing the franchisee the right to duplicate its business, it would want to make sure that the franchisee will take good care of its brand.

This is to ensure that its brand won’t be negatively affected.

As such, in a franchising agreement, the franchisor has significant control over the business operations of the franchisee.

In exchange, the franchisee receives knowledge and guidance from the franchisor.

Aside from just the products and services, the franchisee also receives knowledge of the franchisor’s operations, procedures, trade secrets, etc.

A prominent example of a business that dabbles in franchising is McDonald’s.

As of the time of this article’s publication, there are over 38,000 McDonald’s stores all over the world.

And to quote the McDonald’s page itself, “Approximately 93% Of McDonald’s restaurants worldwide are owned and operated by independent local business owners”.

Meaning that most of the McDonald’s stores you see around isn’t really owned by McDonald’s itself but rather by other business owners via franchising.

Now while the several McDonald’s stores worldwide have different owners, each store looks the same.

This is because franchising requires uniformity to maintain the customers’ familiarity with the brand.

What Franchising Provides

To the franchisor, franchising provides the following benefits:

• Franchising grants the franchisor an additional source of revenue;
• It also allows the franchisor to expand its customer base without having to shoulder the costs of building a store in another location; in most franchise agreements, the franchisee shoulders the costs of building a store;
• The franchisor also does not shoulder the cost of operations of its franchise stores;
• To ensure quality, the franchisor has significant control over the franchisee’s business operations. For example, the franchisor can demand a certain standard on how the store should look.

However, not just anyone can become a franchisor.

Or rather, not anyone can become a successful franchisor.

For franchising to be successful, the franchisor must already have an established brand.

Nobody would want to avail of a franchise that isn’t well-known.

Aside from that, it must be profitable.

Generating profits is one of the primary purposes of starting and operating a business after all.

Of course, that includes franchises.

To the franchisee, franchising provides the following benefits:

• Through franchising, a franchisee can own and operate a business that is identical to the franchisor; this means that the franchisee can make use of its brand, products, services, etc.;
• With an already established brand, the franchisee skips the painstaking process of creating and improving its own brand;
• The franchisee also receives knowledge and guidance from the franchisor on how to do its business operations.

Now while the loss of control over business operations is generally considered a downside, it can also be a benefit.

Since a successful system of operations is already provided for the franchisee, the lack of freedom in business operations isn’t really that bad.

Besides, if a franchisee wants to emulate the success of the franchisor, following its procedures could be a great start.

Licensing vs Franchising

Now that we’ve explored what licensing and franchising are, it’s time to make a comparison.

Now while these two grant the benefit of giving a head start to a new business owner, they provide different things.

Let’s take a look at these differences:

What it provides

Licensing usually only grants the right to use the intellectual property (e.g. trademark, patent, etc.) or technology of the licensor to the licensee.

On the other hand, franchising grants the right to use the franchisor’s brand (which includes its intellectual properties) to the franchisee.

So overall, a franchise provides more things than a license.

For example, a licensee may only make use of a trademark that is stated on the license agreement.

Let’s say that the licensee is granted the right to use the image of the licensor’s mascot character in its merchandise.

The licensee is not allowed to use the trademark in ways that are outside of the license agreement.

A franchisee however can make use of all the intellectual properties that come with the franchisor’s brand.

That includes trademarks, patents, etc.

Control

A commonly mentioned downside of franchising is the loss of control on the part of the franchisee.

In a franchise agreement, the franchisor generally has significant control over a franchisee’s business operations.

The franchisor may provide specific guidelines on how the franchisee should design its store, what uniform its employees must wear, etc.

This is to ensure uniformity among its stores, including its franchises.

The franchisor has a brand to protect after all.

Having a store that it can’t control could potentially damage its brand.

On the other hand, a licensor does not enjoy the same degree of control that a franchisor does.

In fact, the licensor has very little to no control over the licensee’s business operations.

Sure, the licensor can put up stipulations on how its registered trademarks can be used by the licensee, but that’s the only extent of its control.

On any other aspects of the licensee’s business? Nope. Zero control over there.

Type of business

A license mostly applies to product-based businesses.

With a license, a licensee can use the licensor’s trademark on its merchandise.

For example, with a license agreement, McDonald’s can sell toys in the image of certain Disney characters.

This usually happens when Disney wants to promote a new movie. Licenses allow licensees to add a well-known brand or image to their products, which makes them much easier to sell.

A franchise mostly applies to service-based businesses.

I’m talking about restaurants, fast-food chains, hotels, motels, software repair businesses, etc.

For these businesses, their procedures (how they do things) are very important.

You wouldn’t want one store to operate differently from another. This is why a franchise is more appropriate for service-based businesses.

Legal regulations

Comparing the two, a franchise agreement has more legal hurdles than a license agreement.

This could be because a franchise covers a broader category while a license only covers an individual or a set of intellectual property.

In addition, franchise agreements are regulated at the federal level by the Federal Trade Commission (FTC).

Some states may even have additional requirements for franchise agreements.