Licensing vs. Franchising
A popular debate among those seeking to expand their current business is the pros and cons of licensing and franchising. Both are effective means to rapidly grow an existing business, and both have certain benefits. For those wondering which option is right for their situation, this overview may shed more light on the debate, and help you make the right choice for your business goals.
We’ll start by providing a basic understanding of each concept, and then compare the important aspects of both. For more in-depth information or questions regarding licensing or franchising, contact a representative of Franchise Guardian.
What’s the Difference Between Franchising and Licensing?
Franchising and licensing are similar concepts, so similar, in fact, that many confuse the two, even in the world of business. While they are closely related, there are some distinct differences.
A franchise is, “a joint venture between a franchisor and a franchisee. The franchiser is the original or existing business which sells the right to use its name and idea. The franchisee is the individual who buys into the original company by purchasing the right to sell the franchisor’s goods or services under the existing business model and trademark.” It is an extension of an already existing brand or business that wants to expand. Franchising is governed by federal securities law.
To obtain a franchise, you must pay certain fees to the parent company for the right to operate a business that uses their standard operating system, brand name, and proprietary information. An example of a successful franchise is McDonald’s. The fast food giant boasts over 36,000 restaurants in more than 100 countries.
Licensing is, “a business arrangement in which one company gives another company permission to manufacture its product for a specified payment.” A license allows a company to use, make and sell an idea, design, name or logo from another company for a fee. The licensing company expands the reach of their products without it being necessary to invest in new locations and distribution networks.
The Walt Disney Corporation is a giant in licensing. The Disney Consumer Products Branch has licensed movie images and characters to companies selling everything from blankets to toothpaste, with every sort of clothing imaginable, even wedding dresses.
The licensing world can get complicated, with even rivals sharing licensing agreements. Warner Bros., who own the rights to the Harry Potter franchise, allowed Universal Studios to license the theme park rights and create The Wizarding World of Harry Potter. And of course, hundreds of smaller, unknown companies manufacture the plethora of merchandise available surrounding the Harry Potter brand.
Franchising vs. Licensing: Advantages and Disadvantages
A licensing agreement grants another company the right to manufacture and/or sell goods, apply a brand name or trademark, or use patented technology owned by the parent company. The smaller company pays the parent company for these rights.
A franchising agreement grants the franchisee all the help, know-how, brand strength, and business system access of the parent company. The franchise is a smaller copy of the parent company.
Here is a comparison of the major differences:
- Franchise: The parent company usually has tighter operational controls and dictates how a franchisee operates their franchised business. There is a set business manual to be followed so each franchise is the same.
- License: A Licensor usually has little to no operational control as to how a licensee manufactures, markets, and distributes the licensed product.
Training and Support
- Franchise: The parent company provides training on operating of the business as a whole. Ongoing support is also offered through different venues.
- License: Training and support is usually limited to product knowledge.
- Franchise: The franchisee will pay both initial and ongoing franchise fees.
- Upfront franchise fee
- Monthly management service fees
- National marketing fund contribution
- License: A licensed company typically only lays an ongoing license fee.
Licensing or Franchising: Which One Is Right for You?
Whether you choose franchising or licensing to expand your business rests completely on your needs and goals as a business owner. Every business has its potential challenges. As you consider the difference between franchising and licensing, add up the pros and cons of your situation, goals, personality, and products or services.
An experienced franchise consultant from Franchise Guardian can help you ask the right questions and make the best decision for your business. Contact us today to schedule a consultation.