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Licensing Vs Franchising: Find the Difference
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Business partnerships that share particular brand characteristics in return for a fee are known as franchises and licenses. But a license arrangement only covers registered trademarks; a franchising agreement covers a company’s whole brand and operations. Licenses are more suited for product-based enterprises, but franchises usually function best for service-based firms.
Compared to a franchisee, who will have the franchise owner (franchisor) dictate how they manage their business, a licensee has more autonomy over how they conduct their firm. However, the franchisor will also provide a franchisee with a lot of direction and training.
Although there are some links between franchising and licensing, these two agreements are significantly distinct from one another and have different implications for you and your company. We’ll go over the differences between licensing vs franchising in this comparison, along with the benefits and drawbacks of each.
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Table of Contents
What is Franchising?
An agreement between a franchisor and a franchisee is called a franchise. A business is owned by the franchisor. The franchisor offers a franchisee the rights to use their brand for goods and services, intellectual property, and other things. The franchisee then uses those rights to create a second branch that is essentially a copy of the original company, but under a different name.
When exploring the difference between licensing and franchising, it’s important to understand the distinction between these two business models. What is the difference between licensing and franchising? Compared to licensing, franchising involves a deeper, more intricate business connection and agreement. While franchise and licensing might seem similar at a glance, they differ significantly in their structure and control.
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What is Licensing?
Difference between licensing and franchising: Licensing is a constrained legal commercial arrangement in which a certain entity is permitted to utilize a brand’s registered trademarks. The licensor, who is the owner of the trademarks, and the licensee, who has been permitted to use them, are in business together. A royalty fee is agreed upon between the licensee and the licensor to use another brand’s registered trademarks.
In contrast, franchising includes a comprehensive system of operations and ongoing support. A franchisor maintains control over the usage of its trademark and the day-to-day operations of each franchise it manages under its brand name. In a franchise arrangement, there is a greater level of reliance and oversight between the franchisor and the franchisee.
Franchising Vs Licensing Example
Below are few examples on franchising vs licensing, so let’s start:
Franchising Examples
McDonald’s is among the most well-known franchises. The McDonald’s franchise began modestly and now boasts more than 36,000 locations worldwide.
- Burger King.
- Pizza Hut.
- Marriott International.
- Dunkin’.
- 7-Eleven.
- Subway.
- Baskin-Robbins.
- Taco Bell.
- Ace Hardware Corporation.
- The UPS Store.
Many well-known companies, including chain restaurants, run as franchises. The important thing about franchises is that they all have the same feel and design, provide the same goods and services, and provide much more.
Read this guide to know more about Types of Franchises
Licensing Examples
Among the most well-known companies that use license arrangements are Calvin Klein and Disney.
- Calvin Klein has licensing arrangements in place with several manufacturers. This indicates that certain manufacturers have been granted licenses, or loans, by the Calvin Klein firm to utilize its trademarks and brand in order to market their products. Under license agreements, Calvin Klein items, including jeans, perfume, and underwear, are made and branded.
A lesser-known brand can reach the market and gain consumer trust more quickly by licensing the use of a well-known brand name, such as Calvin Klein, than they would if they had to start from scratch.
- Disney is another company that makes use of license arrangements. Probably, products with Disney characters were not made by Disney itself when you buy them. Disney frequently enters into license contracts with companies to utilize its characters and imagery, which explains why you may see Disney characters on a wide range of products, including soap, sleeping bags, T-shirts, and clothes.
In general, well-known and marketable brands are the ones who use licensing agreements the most. A license agreement must benefit both parties if the business branding is already well-known and effective among consumers.
How Does Licensing Differ from a Franchise?
If you’re comparing franchise agreements to licensing agreements, it’s most likely because you want to expand your firm into a franchise or rent the right to use your name by another business. Prior to entering into a legally enforceable agreement, it is important to understand the distinctions between these two commercial agreements.
It would be incorrect for some business owners to view licensing as a simpler option to franchising. These two kinds of agreements are suitable in various situations and have quite different legal implications. Companies that would not necessarily create good license agreements would not necessarily make good franchises, and vice versa. Let’s examine the differences between licensing vs franchising in more detail.
Limitations
The restrictions imposed on licensing agreements are one of the main distinctions between franchising and licensing. A franchise has many less restrictions than a license. Nothing more than the use of registered trademarks is permitted by a license agreement. Conversely, trademarks, other intellectual property, goods, services, operational manuals, and much more can all be used under franchise agreements.
Control
Another difference between franchising and licensing is the degree of control that the seller has over the buyer. The franchisor may specify in a franchise agreement exactly how the franchisee is to market the company, use brand trademarks, situate the firm, and run the business. Stated differently, because the franchisee’s business is effectively an extension of the franchisor’s own, the franchisor has considerable control over the franchisee’s operations.
By contrast, a licensor has very little authority over a licensee’s business. The licensee’s use of protected marks may be subject to restrictions from the licensor, but other areas of the licensee’s company are not subject to their control.
Type of business
Businesses that buy or provide licenses commonly deal with products. Licenses are an excellent way to give a product, like apparel or other consumer items, a well-known brand or image. Franchises, on the other hand, usually run service-based companies. The majority of organizations that operate as franchises include fast food chains, lodging facilities,cleaning services, car repair shops,business consulting services, etc.
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Legal regulations
A franchise agreement tends to be a far stricter and more complex contract. Whereas a licensing deal just involves the straightforward lending of specific protected marks or images, a franchise agreement contains several moving components. General contract law governs both licenses and franchises in these situations. Furthermore, several states have established additional criteria, and there are federal rules that are unique to franchisees.
There are a lot more legal and regulatory formalities to create a franchise than there are for a license arrangement.
Read More: Why do franchises fail?
Pros and Cons of Franchising Vs. Licensing
Choosing which business model is best for you doesn’t end with knowing the distinctions between licenses and franchises. Knowing the advantages and disadvantages of franchises and licenses is also helpful.
Franchising Pros
All the advantages of being a self-employed business owner without the dangers of founding a new company are one of the advantages of becoming a franchisee. One advantage of franchises is that they already have a pre-existing consumer base and a tested business plan. While there may be substantial costs associated with buying a franchise, they may still be less expensive than starting your own firm from the ground up. Buying a franchise is frequently far less hazardous than starting one from scratch.
Another benefit of franchising is a shared relationship. The franchisor can quickly grow their firm while delegating some of the labor to their franchisees. In addition, the franchisee collaborates with the franchisor to operate the company and pick up any new business acumen.
One of the main advantages of franchising over licensing is the close bond between the franchisor and franchisee. Although the franchise agreement is intricate, there are many different chances inside it.
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Franchising Cons
Losing control is one of a franchisee’s disadvantages. Even though it’s your company, the franchisor will make, or at least need to approve, the majority of the important business choices. Although this kind of assistance might be helpful when you’re still getting to know the firm, seasoned entrepreneurs may find it to be micromanaged. The franchisor benefits from this control, though, since they may still specify how their brand is utilized.
A franchise will appear far costlier and more intricate than a license. There are recurring fees to consider in addition to the initial franchise fees, which can range from $10,000 to $50,000. Although this may seem excessive, keep in mind that you will have access to the whole company.
On the other hand, a licensing agreement restricts the manner in which you can use a particular brand. Consequently, a license will be less expensive and difficult to obtain, but it also grants you much less access.
Due to this gap in cost, entrepreneurs may choose to employ licensing agreements rather than franchising agreements; yet, these are not equivalent and frequently do not apply to the same kinds of enterprises. In addition, if you create a licensing agreement for activities that truly come within the franchising umbrella, you run the danger of breaking the law. If the startup costs of a franchise are keeping you from the beginning, you might want to look into these affordable franchise possibilities. You can also look into franchise finance to assist you pay for these costs.
Read More: How to franchise a business?
Licensing Pros
The freedom granted to the licensee is one benefit of licensing. A license arrangement usually takes place between two well-known companies. The licensee is buying the right to use trademarks that are already well-known and valued by a loyal following. This makes licensing a solid investment and a terrific method to improve your business.
Another benefit of a license over a franchise is how straightforward the agreement is. The license agreement will be pretty simple and clear because it only covers the use of one or a few protected marks.
Licensing Cons
Limitations are the main drawback of licensing as opposed to franchising. All that a license permits is the use of specific protected marks; nothing more. Even if it limits the agreement, that may be all your company requires. It is imperative to ensure that you have taken these precautions to safeguard your intellectual property before entering into a license arrangement.
The fact that many individuals are unaware of the real purpose of licenses is another drawback. The appropriate time to draft a licensing agreement and the point at which it crosses a franchise’s legal boundaries are frequently unclear. Prior to signing a franchise or license deal, be sure you get legal advice.
Curious about licensing vs franchising? Find which approach suits your business goals with expert guidance from the National Franchise Association (NFA). Contact us today for personalized support and resources!
Franchising Vs Licensing: What's the Best?
You must take your company’s demands and objectives into account while choosing between franchising vs licensing and making the best decision for your company.
If you are going to be the franchisor or licensor, you should think about if your brand is powerful, well-known, and profitable enough to make it work well as several branches or when it is imprinted on goods you don’t already sell. If this is the case and you manage a service-oriented business, franchising can be the best course of action.
It could be advisable to license if that is the case and your business is product-based. In either case, you should speak with a business attorney to go over the intricacies of growing your brand after speaking with a trademark attorney to protect your intellectual property.
Consider where your company is in its journey from the standpoint of the licensee vs franchisee. If your product-based firm is doing well and you are looking to expand, a license deal with a well-known brand can be a simple approach to get things moving quickly.
A franchise is your best option if you want to launch a business but want the lesser degree of risk that an established brand offers. You should also look for a mentor who can provide you with practical guidance. You can connect with National Franchise Association Team for the mentorship.
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FAQ's
The main difference between franchising and franchisee is that franchising is the business relationship between a franchisor and a franchisee, while a franchisee is the person or corporation that operates the business.
Licensing agreements are more common. Franchise agreements are more prevalent.
The primary advantage of licensing is that the firm does not have to bear the development costs and risks associated with opening a foreign market.
The Bottom Line
There is a very subtle distinction between licensing vs franchising, based on the level of control established by the underlying agreement. Franchising allows a brand to expand to multiple locations, with franchised sites operating under standardized procedures and maintaining consistent standards. In contrast, licensing involves making trademarks and other intellectual property profitable through agreements that permit independently run enterprises to use these assets, often with less control over their operations compared to franchising.
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