Franchising vs Licensing

Posted on Mon, 11/13/2017 - 17:05 by avantgarde

For a company looking to expand, franchising and licensing are often appealing business models. In a franchising model, the franchisee uses another firm's successful business model and brand name to operate what is effectively an independent branch of the company. The franchiser maintains a considerable degree of control over the operations and processes used by the franchisee, but also helps with things like branding and marketing support that aid the franchise. The franchiser also typically ensures that branches do not cannibalize each other's revenues.

Under a licensing model, a company sells licenses to other (typically smaller) companies to use intellectual property (IP), brand, design or business programs. These licenses are usually non-exclusive, which means they can be sold to multiple competing companies serving the same market. In this arrangement, the licensing company may exercise control over how its IP is used but does not control the business operations of the licensee.

Both models require that the franchisee/lincensee make payments to the original business that owns the brand or intellectual property. There are laws that govern the franchising model and define what constitutes franchising; some agreements end up being legally viewed as franchising even if they were originally drawn up as licensing agreements.

Advantages

Owning a franchise allows an individual to be self-employed while also investing in a proven system with training and support. It brings a ready-made customer base and often comes with client listings. There is a reduced risk of failure, on-going research and develop, and a semi-monopoly in a certain territory. For franchisors, franchising allows them to expand their business for less investment than opening new locations themselves.

A license allows the licensee to use, make and sell an idea, design, name or logo for a fee. They are advantageous for licensors because they allow them to expand their business’ reach without having to invest in new locations and distribution networks.

Things to Consider

When buying a franchise, a businessman should look at balance sheets and bottom lines and compare it to similar franchises in similar areas. They should perform a name-brand availability search and investigate Intellectual Property issues such as patent ownership.

Anyone selling a franchise should be sure to protect their Intellectual Property and create comprehensive work manuals and maintenance programs.

Anyone selling a license should ensure that their Intellectual Property is protected by law and specify what rights it grants the licensee.