Franchising and licensing are two popular business models. Both models offer certain advantages and disadvantages to both parties in the arrangement.
Let us discuss what are franchising and licensing and their key differences.
What is Franchising?
Franchising refers to a business agreement between a franchisor and a franchisee where the franchisor remains the legal owner of the business.
The franchisee receives the legal rights to access products, services, patents, brand names, and other assets of the franchisor.
In practice, a franchise is a new branch of the same business under the same brand name, logo, and trademark assets. Thus, a franchise business is a cologne or replica of the main business with each new branch opened.
Both parties agree on certain terms and conditions. Legally, the franchisor remains the owner of the branch and the franchisee can own the branch as long as it fulfills legal requirements.
Franchising Examples
Many renowned global brands follow the franchising business model in the food, hospitality, clothing, and fashion industries.
Some leading brands that follow the franchising model include:
- Marriot International
- Mcdonalds
- Burger King
- Subway
- Pizza Hut
- 7-eleven
- Ace Hardware Corporation
How Does Franchising Work?
Franchising is a popular method of business expansion for many brands around the world. They receive franchise or branch requests formally from investors in different regions.
The applicant pays certain franchise fees, fulfills legal requirements, and completes the prequalification requirements such as arranging the business place.
Once approved, both parties sign a legal agreement that entitles the applicant to open a new branch with the brand name, logo, patents, trademark, and assets provided by the franchisor.
On top of the one-time franchise fee, the franchisee also pays royalty or commission on sales. The commission structure is usually a fixed percentage of the total revenue of the franchise.
The franchise system offers control and legal protection to the franchisor. The agreement is legally protected for both parties. It means the franchisor can regain ownership or cancel the membership of the franchisee if it does not comply with the legal requirements.
On the other hand, the franchisee receives an established system. The franchisee can save costs on establishing a new system from scratch.
Franchisees take advantage of the brand name more than anything else. It means they do not need to spend hefty amounts of marketing and convincing customers.
Franchising is a comprehensive business model that offers a win-win situation to both parties. It also enables customers to receive standardized services at every place.
What is Licensing?
Licensing is a business agreement between two parties where the licensor allows the licensee to use assets or trademarks.
A licensing agreement may also be arranged between two parties to produce goods and offer services using the licensor’s brand name.
As compared to franchising, the licensing model is a limited business arrangement. Often, the licensee can use the allowed trademarks and patents but cannot reflect the ownership or association with the brand (licensor).
Licensing also comes with legal protection for both sides. It means the licensor holds rights to regain control of its assets and cancel the agreement if the licensee does not comply.
The licensee pays a royalty fee against the licensing arrangements as in franchising.
Examples of Licensing
Licensing arrangements can be allowed in different ways. In some cases, the licensor offers licensing for the production and selling of products without allowing the licensing to own the licensed brands.
Some leading examples of licensing business model include:
- Disney
- Starbucks
- Calvin Klien
- Warner Media
- Universal Brand Development
- Hasbro
- Sanrio
How Does Licensing Work?
The licensing model works where the applicant requires access to assets, patents, trademarks, and technology developed and possessed by the licensor.
Often, the licensee looks to expand the product range or improve the technology by acquiring licensed assets.
In some cases, the licensee cannot resell or reproduce products/services using the licensed assets of the licensor. For instance, users around the world use Microsoft’s licensed products but cannot resell them to customers.
With licensing arrangements, the licensee can access technology and assets developed by the licensor. A licensee can produce goods/services and sell them to the market using the brand name of the licensor.
Instead of allowing branches or new business centers, licensors allow certain businesses to produce goods/services using the same facilities.
This way, the products produced around the world reach the customers using the same brand name, logo, and patents.
Licensing agreements also require licensees to follow and uphold certain quality standards as well as legal compliance.
The advantage for the licensee is the retention of control. They can produce other products and offer other services than the licensed ones as well. They do not need to produce only licensed products.
Pros and Cons of Franchising
Franchising has its pros and cons as compared to licensing.
Pros Explained
The franchisor and the franchisee are protected by the legality of the franchise arrangements.
The franchisee receives an established form of business that works as an extension of the franchisor’s business.
The franchisee can grow quickly with an established brand name, access to the developed technology, and successful products.
On the other hand, the franchisor keeps good control over the franchisee. The franchisor does not allow the franchisee to introduce new products without prior approval.
From a customer’s perspective, the franchise system means there will be similarities in products and services on offer everywhere.
Cons Explained
Franchising means a loss of control over the business model. Franchisees cannot implement their business ideas or introduce new products willingly as and when they want.
Also, they’ll need to share a proportion of revenue with the franchisor that may seem a higher cost in the long run as compared to an independent business.
Despite being under the umbrella of the franchisor, the franchisee has to deal with certain compliance and financial requirements.
Unlike the common notion, franchising also requires an initial investment like an independent business including initial franchise fee, business set up, staff hiring, and other resources.
Pros and Cons of Licensing
Licensing comes with some advantages and disadvantages for both sides as well.
Pros Explained
Licensing allows more control over the business as compared to franchising. A licensee can introduce new business ideas, products, and offer customized services as and when required.
Licensing is also cheaper as compared to franchising as the limited partnership requires lower royalty fees.
Licensing offers greater market growth and expansion opportunities without much restrictions. A licensee can expand with licensing to introduce new products and services without needing to open new locations.
Cons Explained
Licensing does not offer full-scale business support. It does not replicate the standard business structure everywhere.
Licensing offers limited business growth prospects as compared to franchising. A licensee would require more resources to invest for growth as compared to franchising where the franchisor takes the bulk of product development tasks.
Franchising Vs Licensing – Key Differences
Let us summarize the key differences between the two business models.
Process
A franchise application and initial approval are required. After approval, both parties sign a formal agreement that outlines the business terms, royalty share, and other specifications.
The franchisor offers initial training and support to the franchisee.
Licensing also requires an initial application and an agreement between both parties. A licensor does not offer technical support or training to the licensee.
Ownership
The franchisee keeps the ownership of the franchise (branch). The franchisor keeps the brand name, logo, patents, and trademark of the business as a whole.
The licensee keeps full control of the business with licensed products, patents, or trademarks.
The licensor holds control of the patented product, logo, or asset offered to the licensee only.
Legal Protection
Both types of business models come with legal protection.
A franchise agreement binds both parties to legally comply with their required terms and conditions.
Similarly, an agreement protects both parties in the licensing arrangement as well.
Business Model
A franchise system follows the chain business model. It is favored by businesses with replicated business structures like restaurants, hotels, service shops, etc.
Licensing is more favored by businesses with discrete products, research, patents, and trademarks. It favors the business expansion through patented products.
Control
A licensee enjoys more control over the business as compared to a franchisee.
A licensee can introduce new business products and follow the business model independently.
On the other hand, a franchisee cannot introduce new products and follow a customized business model independently.
Costs and Effectiveness
Generally, a franchised system will be more costly. A franchise would require initial investment as well as ongoing royalty fees.
Depending on the licensed product, a licensed business would be cost-effective as compared to the franchise model.
Suitable For
Generally, a franchised business model is suitable for the service industry. It suits the businesses that follow a standard and uniform service approach.
The licensed business model is more suited for businesses with tangible products.
