Franchising vs Licensing: Everything You Need to Know

June 3, 2024
Franchise Management

The franchise model is great because most people who are entrepreneurial want flexibility and time to do what they love. A lot of home business entrepreneurs struggle because they have to do everything.

- Ray Vaden, Author

You own a brand, and it is doing well. Your 3 outlets are nearing profitability, and you have big ideas for expansion. Before planning expansion, you need to understand two important business terms: Franchising and Licensing.

Both franchising and licensing are types of business agreements that allow you to expand your brand aspects in exchange for fees or royalties. However, several key differences between them impact the degree of independence you can bestow on your partners while giving them the rights to your brand.

Here is a comprehensive guide on franchising vs licensing to help you gain a deeper understanding of the concept.

What is Franchising?

Franchising is a business agreement that enables individuals or businesses to operate a business (store, restaurant, service, etc.) by 'borrowing' the brand from a franchisor. Franchisors are always looking to expand and franchising allows them a regulated and safe way to do that without risking too much of their capital. When you franchise your business, you're essentially saying that you are open to other people operating a branch or outlet with your brand and guidelines.

The Federal Trade Commission regulates franchises. Additional state laws may apply based on the business.

In a franchise, the roles of the franchisee and the franchisor are clearly defined:

  • The franchisor lends the brand and operating model to the franchisee.
  • The franchisor provides training, guidance, expertise, and support to the franchisee for running the business effectively.
  • In exchange, the franchisee pays the franchisor a fee. The fees generally include a one-time fee and ongoing fees based on the terms of the franchising contract. 

One of the most popular examples of a franchise is McDonald's – the brand has about 41,800+ restaurants worldwide (2023).

What is Licensing?

Licensing is a more restrictive version of a business agreement. It provides the licensee with a very specific set of rights to use registered trademarks of a brand for specific purposes. This essentially means that you wouldn't have much control over how your licensee operates their business with your trademarks.

The two parties that sign the licensing agreement are the licensor (the party that owns the trademarks—you) and the licensee (the party that gains the rights to use them).

The licensee is liable to pay the licensor an agreed-upon royalty in exchange for the right to use the licensor's registered trademark.

One of the most popular examples of a licensing arrangement is Disney. The brand loans the right to use its characters and logos on fan merchandise in exchange for a royalty fee. That is partly why you see Disney merch and toys anywhere in the world.

Differences Between Franchising and Licensing

Licensing vs. franchising may look similar. However, they differ in the process and degree of control that you have over their brand and practices.

To understand licensing vs franchising better, here is a primer:

Property Licensing Franchising
Essence Licensing only permits the licensee to use the intellectual property or product in exchange for a royalty fee. Aside from using only certain aspects of the parent brand, a license does not permit any 'liberties.' Franchising allows the franchisee to use the brand’s business model and name to conduct their own business in the form of an independent branch of the parent company. The franchisee pays a fee to the franchisor.
Governance Contract Law governs the licensing agreements between the two parties. Depending on the case, FTC regulations or Company Law govern franchise agreements between two parties.
Training/Support In a licensing agreement, the licensor is not liable to provide any training or support to the licensee. This is because the ambit of a license only covers the usage of products, services, or brand names through another business. Franchising agreements typically include training and support for franchisees. This is because franchisees adopt the business model of the parent company and must follow the same operations practices as the parent brand.
Control Licensing agreements provide the licensor with control over the use of intellectual property or products and services of the parent company by the licensee. However, the licensors do not have permission to control the licensee’s business in any way. In a franchise, the franchisor has considerable control over how a franchisee conducts business at their branch.
Process After the licensing agreement has been executed, the process of licensing is essentially over. All that remains is for the involved parties to remain compliant with the terms and conditions mentioned in the licensing agreement. A business franchise is an ongoing venture. The franchisee needs frequent guidance, training, and support from the franchisor to ensure consistent performance and adherence to SOPs.
Fee Structure The fee in a licensing agreement is called “royalty.” Royalty is a fixed percentage of the sale price of the items that use the licensor’s brand that the licensee pays. A franchising fee is a standard or fixed amount that the franchisee pays to the franchisor periodically – it may be monthly, quarterly, or annually. This fee is non-negotiable. It has several components, including but not limited to advertising fees, training fees, ongoing franchise fees, royalties, technology fees, etc.

Which is Right for Your Business: Licensing vs Franchising

In a nutshell, franchising is a ready-made business model that you can "lease" to another business or individual with a view to expanding your own. Licensing, on the other hand, is when you lend certain aspects of your brand to another business, which helps you boost your sales.

When considering franchising vs. licensing, evaluate the context of what works for your business expansion plans. If you have a well-established trademark that is popular among your target audience, consider licensing its rights to other businesses to reach more markets.

On the other hand, if you are planning to open up more branches, franchising is the way to go.

If you have decided to pursue your chosen business model—whether franchising or licensing—make sure you have the right tools to run it. That's an entirely different topic. Stay tuned! 

Meanwhile, give your business a competitive edge with the right retail operations software.

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