Licensing and franchising are two business models that companies use to expand their operations and enter new markets, with significant differences, but not always. It is not always easy to tell them apart. Here are definitions of licensing and franchising, and then the differences between them.
What is Franchising?
Franchising is a business agreement between a franchisor and a franchisee. A franchisor is a business owner. The franchisor sells the rights to their brand, including products and services, intellectual property, and more. A franchisee who will open a separate branch under this trademark is, in fact, a clone of the original business.
Franchising is governed by the FTC franchising rules and is subject to state law. Franchising is a deeper and more complex business relationship and arrangement than licensing. The franchisor retains control over how its trademark is used and how each franchise operates under its own name. There is a great deal of interdependence in the franchise relationship between the franchisee and the franchisor.
What is Licensing?
License refers to a commercial agreement entered into between two parties in which one company authorizes the other to use its intellectual property for a specified period and under specified conditions, which is possible through licensing. This will include the company’s manufacturing process, copyrights, trademarks, patents, technology, etc. A company that allows another company to use its intangible assets is called the licensor and the party who is given the license is called the licensee. The licensor charges the licensee a fee or royalty for the use of its intellectual property.
In simple terms, licensing refers to a business model in which knowledge based on the products of one company is leased to another, allowing the company to enter a new market. For example, licensed trademarks Coca-Cola and Pepsi are provided to local bottlers around the world to manufacture and market their drinks.
Additional resource: How to apply for an International Trademark?
Franchising vs Licensing – 8 Major Differences
The licensing process is governed by a licensing agreement, which includes a one-time transfer of ownership or rights for a fee. In most cases, licensors do not provide technical support or assistance.
Franchising is governed by a detailed agreement that outlines the responsibilities and obligations of both parties involved. Franchisees help build a service provider with the necessary skills and knowledge to communicate their brand to customers
Overall, the franchise agreement is much more stringent and complex. There are many moving parts in a franchise agreement where the licensing agreement is a simple loan of some protected trademark or image. In both cases, the general contractual rules for both the license and the franchise are respected.
In addition, there are special federal rules for franchising at the federal level and some additional requirements set by some states. There are more legal hurdles and regulatory requirements when starting a franchise than with a licensing agreement.
3# Degree of Control
Another difference between a franchise and a license is the degree of control a seller can exercise over a buyer.
In a franchise agreement, the franchisor may establish specific guidelines as to how the franchisee should sell the business, use the trademarks, where the business is located, and how the business should be conducted. In other words, the franchisor can exercise significant control over the franchisee’s business and how it works, because it is essentially an extension of the franchisee’s business, its own business.
In comparison, the licensor has little or no control over the licensee’s business. The licensor can establish the rules for the licensee’s use of the protected marks, but cannot control any other aspects of the licensee’s activities.
4# Business Type
In most cases, the companies that issue or buy licenses deal with products. Licenses are great for adding a well-known brand or image to a product, such as clothing or other consumables.
On the other hand, franchising is generally a service-based business. Most franchised businesses are restaurant chains, hotels, cleaning services, auto repair shops, software repair companies, and more.
The licensee buys the right to use a certain patented / original product only from the licensor in exchange for royalties.
In franchising, the franchisee purchases the right to run the business by doing the same business on behalf of the franchisor in exchange for a fee.
One of the key differences between a franchise and a license is the limitation set out in licensing agreements. The license has much stricter restrictions than the franchise.
The license agreement permits the use of trademarks, nothing more. On the other hand, franchise agreements allow the use of trademarks, additional intellectual property, products, services, operating instructions, etc.
7# Obtaining Contract
Well-known companies wishing to become licensees can use their proven success as a way to obtain a license from large companies like Starbucks.
After expressing interest in a brand, franchisees must go through a successful selection process with the franchisor, in which potential franchisees must demonstrate that they meet the most financial requirements, such as minimum working capital. The management team is also a typical example.
Licensor achieves vertical market integration without major capital investment
and enhances brand value. The licensee gains market access by relying on a strong brand name and eliminating competition.
The franchisor has access to geographically diverse markets without compromising brand value. The franchisor get support to expand an already successful business.
The Bottom Line
When deciding what’s right for your business and comparing franchising to licensing, you must consider the needs and goals of your business.
If you are a franchisor or licensor, it is important to consider whether your brand is strong enough, widely recognized and generates such significant profits that it will perform well in many markets, or by stamping other products that you do. If this is true and your business is based on providing services, then franchising may be the right decision. If that’s true and your business is product-driven, then licensing is best.
In any case, you need to consult with a trademark attorney to protect the ownership of the trademark, and then with a business lawyer to discuss the details of expanding the trademark.